Bombardier (TSX:BBD.B) stock jumped 53% in two months from $57 to $87 after the first-quarter earnings and 2024 Investor Day presentation left shareholders smiling teeth to teeth. The $57 price was closer to the upper end in 2023. Even if you had invested in this stock at its higher range, you would have made a 50% return in a year. And if you had bought the dip of October 2023, when the overall market was down due to rising interest rates and the stock was trading near $40, your money would have doubled. This under-the-radar Canadian stock has become the biggest turnaround story of TSX.
Is this under-the-radar Canadian stock a buy at its high?
And if you are wondering, there is no point buying Bombardier at $87, think again. You might be missing out on future growth prospects. Many investors shied from buying Bombardier stock, thinking the turnaround was over. But the business jet maker has more cards in its arsenal.
Tax attributes
The multi-year losses before the 2020 turnaround that once was a liability are now an asset for the company. It can use these losses to offset future profits and reduce tax liability. This tax attribute is a whooping US$12 billion, 150% of its 2023 revenue (US$8 billion).
There is still growth in business jet deliveries
During the restructuring, Bombardier exited the small-cabin jets to improve profitability. That has helped it improve margins and free cash flow. Today, its revenue growth comes from jet deliveries of medium and large-cabin aircraft. The business jet demand picked up post-pandemic as many high-net-worth individuals opted to buy new aircraft. It delivered 138 jets in 2023 from 123 in 2022.
The company aims to deliver 150 aircraft in 2025 and sustain this order volume. It expects global aircraft demand to be around 375 annually for the next 10 years. It is also upgrading with the next-generation large-cabin carrier Global 8000, scheduled to enter service in 2025.
More scope for business efficiency
While more aircraft deliveries will increase revenue, Bombardier is looking to cut costs further. And one major cost is interest expense. Despite paying down US$4.5 billion since 2020, it still has US$5.6 billion in debt on its balance sheet.
When you have high debt, the bank requires you to keep a higher amount in your account as a safety net to recover loan payments from your balance. This cash remains idle as you cannot reinvest it, lowering your opportunity to earn more.
Bombardier’s accelerated debt reduction and growing free cash flow helped it secure better terms. With financial flexibility in sight, the company is reducing its liquidity requirement from US$1.8 billion in 2023 to US$1-1.5 billion by 2025. It means it can reinvest more money and earn from it.
Moreover, Bombardier will continue to repay debt and bring down net debt to two times its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). If we look at its 2025 objectives of US$1.62 billion adjusted EBITDA, its net debt should reduce to US$3.25 billion from US$4.1 billion in 2023. Another $850 million in debt repayment is likely and could reduce interest expense. Moreover, interest rate cuts in future years could ease the interest cost.
Add to this its efforts in aftermarket expansion and production efficiency of Global 7500 jets. All these efforts could further boost operating efficiency and hike the adjusted EBITDA margin to 18% in 2025 from 15.3% in 2023. Better efficiency could increase free cash flow to US$900 million from US$257 million in 2023.
If things continue to progress as they are, the stock could cross its 52-week high.
What is coming for Bombardier stock beyond 2025?
Bombardier stock will continue to be a growth stock until 2025. Beyond that, the company could see stagnation in aircraft deliveries. Hence, it is working on new revenue streams: the defence sector, aftermarket service expansion, and the pre-owned market. Once the growth stabilizes, the management will consider allocating a portion of its capital for dividends and stock buybacks. Until then, high capital appreciation is likely.
