Why Bombardier Stock Remains A Strong Buy (OTCMKTS:BDRBF)

In April 2024, I reiterated my strong buy rating for Bombardier (OTCQX:BDRBF)(TSX:BBD.B:CA) stock and that call has worked out very well with a 51% increase in the stock price compared to a 4.5% increase for the S&P 500. This latest surge in the stock price brings the share price increase to 93% since I upgraded Bombardier stock to strong buy in October 2023. In this report, I will be discussing the most recent quarter and discuss whether the stock remains attractive at current price levels.

Bombardier Revenues And Earnings Continue To Fly Higher

In the second quarter we saw revenues grow by 31.5% from $1.675 billion to $2.203 billion driven by a 36% increase in manufacturing revenues and an 18.5% increase in aftermarket revenues. The higher manufacturing revenues were firmly supported by a 34.4% increase in aircraft deliveries, which saw an increase of 5 units in the large as well as medium-sized jets deliveries. Bombardier lost 11 production days during the quarter, but since there is a timing effect, the impact was not notable in the second quarter and the company expects to catch up in the balance of the year.

Given the supply chain issues faced, the delivery volumes and revenues are strong and while the supply chain is not where it is supposed to be yet, Bombardier has indicated that things are trending in the right direction.

Adjusted EBITDA increased by $60 million or 21.8% reflecting the higher deliveries, while adjusted EBITDA margin declined from 16.4% to 15.2%. Adjusted EBIT grew $26 million to $216 indicating a 13.7% increase but again with a margin pressure. Reported EBIT declined $54 million or 22% to $191 million. The margins were down due to differences in mix year-on-year. Defense deliveries were more prominent in the mix in the same quarter last year and this year there are more Challenger deliveries this year. So, the lower margins are an effect of mix and Bombardier is more or less taking a hit on margins because it was very successful selling more Challengers for delivery this year and Defense is still a bit of a lumpy business.

Bombardier

Adjusted net income grew nearly 40% to $111 million as higher losses on debt repayment were added back to the net income line while there was a $25 million settlement added back, partially offset by gains on financial instruments being subtracted. This resulted in adjusted earnings per share of $1.04 compared to $0.72 a year ago.

Free cash flow usage tapered from $222 million to $68 million, driven by lower CapEx as last year’s CapEx was still impacted by spent on the new production facility. Operating cash flow improved by nearly $100 million reflecting continued working capital build but seemingly at a lower rate than last year, partially offset by a reduction in advance payments in the range of $100 million.

Other highlights were the 1.0 book-to-bill ratio signaling continued demand for Bombardier’s products, the backlog now stands at $14.9 billion. The company’s liquidity currently stands at $1.3 billion, which covers debt maturities through 2027 with no maturities in 2024 or 2025. So, we have a very nice runway with no maturities, and we should also note that Bombardier is retiring debt ahead of schedule with another $800 million to be repaid ahead of schedule in the next 1.5 years. In the high interest rate environment, repaying debt ahead of schedule makes sense and for Bombardier it even is the case that refinancing makes sense because the interest rates on new bonds are lower than on the bonds that it is refinancing. That reflects the reduced risk on Bombardier resulting in lower coupon rates despite the elevated interest rate environment.

Bombardier has not changed its guidance, meaning that the company still expects around $8.5 billion in revenues and adjusted EBITDA of $1.325 billion with free cash flow between $100 million and $400 million.

Bombardier Stock Has Significant Upside

I have added the most recent projections on EBITDA, free cash flow, debt reductions and the balance sheet data to the evoX Stock Screener. After implementing the 1.6% higher EBITDA that analysts are expecting and a 7% increase to free cash flow compared to the previous estimates, we see that Bombardier stock remains a strong buy. Valuing the stock one-year ahead of earnings, we see that there is 36% upside to $80.95 and a second opportunity for share price appreciation is multiple expansion towards peer group valuation. As a result, I believe that Bombardier stock remains a strong buy.

Bombardier: A Recession Could Weaken Business Jet Momentum

There are several risks that Bombardier faces. On the supply side, continued supply chain constraints might result in the company missing its delivery target or require an increased level of inventories to reduce the risk of missing delivery targets. Currently, there is no indication that Bombardier will be missing its delivery target, but it is a risk that does exist in the current environment for aerospace products. Furthermore, the business jet indicator has been below the stability threshold level since Q1 2023 while we also see an uptick in total pre-owned business jet inventory which can be seen as an indicator of softening demand. Those indicators are important to keep in mind, but also to put them in context. During the pandemic, demand for business jet travel was higher as airline travel was either not possible or not favored, driving some travel towards the business jet mode of transport. Currently, we see that pre-owned business jet inventory is rising, which could indicate some softness in the market. The inventory is still below historical levels, but it is a fact that it has been on the rise.

Perhaps, the good thing for Bombardier is that the inventory of jets that are 10 years old or less is small and the same holds for the large body segment, which is increasingly becoming a focus point for Bombardier. The lower pre-owned inventory for these two segments provide an indication that there is no oversupply in that segment and that there is a preference in the market for newer jets, which in some way could also explain the higher inventory levels. So, the rise is not necessarily fully conclusive of the demand profile, but overall, we see that the market for business jets is operating below its stability threshold for the past 18 months. With the recession concerns, it is key to keep an eye on this indicator.

Conclusion: Bombardier Stock Could Fly Higher

After processing the most recent numbers for Bombardier and a surge in its stock price, I believe that Bombardier has significant space ahead to head even higher. We should keep an eye on any recession and its impact on business jet demand, but we see that the company is deleveraging fairly well, fully supported by its business jet business. Years ago, the question was how Bombardier was going to reduce debt if it was not generating a positive free cash flow, and we see that the company is now generating free cash flow which allows the company to retire debt ahead of schedule and refinance at lower interest rates which provides the company with a lot of flexibility in the coming years. In fact, in our current assessment, there is still space to retire $1.4 billion of debt ahead of schedule. So, Bombardier is in a very comfortable position, and I am maintaining my strong buy rating.

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