Bombardier (TSX:BBD.B) stock has slipped 25% since December 26, and the 2024 earnings could not revive investor confidence. This isn’t the first time the stock has witnessed such a sharp dip in two months. It fell 25% between March and May 2023 as it saw its second-quarter earnings per share (EPS) fall to US$0.72 from US$1.06 in the first quarter of 2023.
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Why did Bombardier’s stock price fall?
In the full year of 2024, Bombardier’s diluted EPS fell to US$3.4 from US$4.3 in 2023 despite reporting higher revenue and operating margin. Behind the earnings dip was a 14% increase in finance expense to US$677 million due to a non-cash change in the fair value of embedded derivatives related to call options on long-term debt of $327 million. In simple words, Bombardier had hedged itself from rising interest rates using call options. Now that the Bank of Canada has slashed interest rates, these options have lost value, and the company has realized a non-cash loss.
Now that the Bank of Canada has reversed its interest rate course, Bombardier can replace its high-interest debt with cheaper debt. Moreover, it has no 2025 debt maturities, giving it the flexibility to continue investing in the business or hold high cash reserves for uncertainties. Bombardier is holding on to a US$1.6 billion cash reserve and had a US$429 million revolving credit facility at the end of 2024.
Short-term outlook for Bombardier
Bombardier achieved two milestones in 2024.
First, it successfully delivered two defence-related aircraft to the German government and the U.S. Army. The company leveraged its existing platforms for defence aircraft to earn more returns from fewer investments.
Second, it achieved its 2025 aftermarket service revenue target of US$2 billion in 2024. It is servicing more than 5,100 jets. Increased business flying activity could keep service revenue strong.
A better product mix and lower research and development expenses helped Bombardier improve its adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) margin to 15.7% in 2024 from 15.3% a year ago. It aims to increase this margin further by focusing on higher-margin products.
Bombardier will also bring into service its flagship Global 8000 large cabin aircraft in 2025 and grow its revenue to US$9 billion.
Is it too late to invest in this stock?
Bombardier rose to fame as a turnaround stock. Its current chief executive officer, Eric Martel, took the near-bankrupt company with multi-year losses and US$10 billion debt into profits. Between October 2020 and 2024, the stock price surged 1,472%. Hence, the stock is sensitive to any dips in earnings per share and increase in debt.
The stock is past its turnaround rally and has entered a normal growth phase of 20-25%. If you are looking for turnaround-like returns, it is too late to invest in Bombardier. However, if you are looking for stable double-digit growth, now is the time to buy the stock. The 25% dip has pulled down its forward price-to-earnings ratio to 8.45, the level last seen in December 2023.
Bombardier’s focus on a higher-margin product mix could drive its future earnings and increase the share price in the long term.
