Bombardier Inc. Beats the Street, But Has Anything Really Changed?

Bombardier Inc. (TSX: BBD.B) is drowning in US$8.7 billion worth of debt, which is expected to grow even larger as the Company continues to spend $750 million more for its CSeries project

SmallCapPower | July 31, 2017: Bombardier Inc. (TSX: BBD.B) Friday reported its second-quarter financial results, beating the consensus estimates. EBIT before special items came in 55% higher at $164 million beating analyst estimates of $134 million. EBIT margins before special items were 8.2% for the Transportation segment, a robust 8.9% at Business Aircraft segment and 7.7% at Aero structures segment. Free cash flow usage was $570 million in the quarter and $1.2 billion year-to-date, attributable to the Global 7000 test program coupled with the C Series working capital and production ramp up.

Related: Bombardier (TSX: BBD.B) Stock: Is it Worth the Risk?

Bombardier’s revenue fell ~5% to $4.10 billion in the quarter because of a decline in sales in its business aircraft (6%) and commercial aircraft segments (16%) offset by increasing transportation segment revenues (1%).

Adjusted net income, which excludes some items, was $39 million, or $0.02 per share, in the second quarter, versus a loss of $83 million, or $0.06 per share, a year earlier. Consensus was expecting a loss of $0.01 per share.

Bombardier expects its FY2017 earnings before interest and taxes (EBIT) to be at the higher, and in the range of $580-630 million and free cash flow usage between $1.0 billion and $750 million.

Alain Bellemare, President and Chief Executive Officer of Bombardier said, “We continue to make solid progress executing our five-year turnaround plan. We are improving our operating margins, transforming our operations and executing on our growth programs, which will allow us to deliver long-term sustainable value to our customers and shareholders.”

Bombardier is drowning in US$8.7 billion worth of debt, which is expected to grow even larger as the Company continues to spend $750 million more for its CSeries project. Given that the management team is incapable of estimating a budget, the actual amount of spending on the CSeries could be much higher than the $750 million.

Bombardier has a relatively weak balance sheet, reflected by their poor liquidity and aggressive leverage. The Company has a 0.48 quick ratio and 1.12 current ratio, suggesting they may have trouble meeting current obligations, especially due to the fact they only sell half of their inventory every year. Furthermore, Bombardier is highly levered compared to the industry as they have a 168% debt to total capital ratio, and a net debt to EBITDA ratio of 29x, compared to the industry median of 26% and 7x, respectively.

Shares of Bombardier climbed 4.56% to close at $2.52, posting an intraday high of $2.57. Bombardier currently trades at TTM price to sales multiple of 0.35x.

Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.

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