CA - Bombardier Stock Surges: A Bullish Growth Future

2023-03-23 14:57:43 ET

Summary

• Bombardier increased its 2025 targets.
• The company is positioning for post-2025.
• Improved cash flow brings shareholder returns back into the picture.

Bombardier ( BDRAF ) hosted its Investor Day on the 23rd of March, and it was one where Bombardier articulated its plan for the coming years quite well, especially when you consider how they did guide previously. It is a testimony towards a lower-risk approach the current management is taking. In this report, I will be looking at the outlook provided.

Bombardier Guides Higher For 2025

So, let's start with one of the most important items and from there expand on what is driving those changes. That important item is the update to the 2025 objectives. What we see is that the revenue target increased by 20% while EBITDA target is increasing 8%. What one would like to see is that EBITDA is growing in line with revenue growth and that is not the case, but I think there is a good reason for that. The first one is on the growth trajectory for high-margin businesses slowing down a bit as some saturation point is met, and the second one is investments required to grow the business beyond 2025. What previously should have been a tailwind on pricing is now merely serving as a buffer to offset some pricing pressures on the cost of goods due to inflation and supply chain challenges. Either way, with solid business prospects, the free cash flow guidance has been raised from greater than $500 million to greater than $900 million, providing an 80% boost to cash flow guidance outgrowing the relative revenue growth. This solid cash generation also allows the leverage to come down further than initially targeted and even allows the company to further deleverage beyond the current set targets.

The core of the Bombardier business is, of course, business aviation jets and expanding in that area adds significant value but also drives additional aftermarket sales and growth of the installed base, which also allows growth in the certified pre-owned program. Between 2022 and 2025, the industry revenue forecast points at a 38% growth for medium and large business jets. It also seems that Bombardier made the right decision by exiting light jet manufacturing, as this segment is expected to decline.

What might be somewhat disappointing is that the delivery outlook does not grow in line with the industry revenue forecast for medium and large business jets, as deliveries are expected to grow only 25%. However, I would also point out that Bombardier is aligning its production with backlog and customer demand seen in the marketplace that allows for consistency in the mid- to longer-term production view, and the company does not require material investments to increase production.

Skipping to Defense, that is a big growth area for Bombardier. Bombardier established the Defense segment last year, and it sees a greater than $1 billion market opportunity for deliveries and support beyond 2025. That is clearly one of the areas where Bombardier has to grow and that is requiring some investments in the years to come that pressure EBITDA margins. Investing for growth in the future can hardly be seen as a bad thing. Towards 2032, Bombardier forecasts demand for 375 airplanes focused on VVIP (Very very important person), maritime patrol, C2 (command and control), and ISR (Intelligence, Surveillance and Reconnaissance). So, that is clearly a growth area for the company that will fuel growth beyond 2025.

In the after-market sales segment, we see that growth rates are expected to slow with a 10% annual growth rate for Bombardier, compared to 20 to 25 percent in previous years. So, that is the business that will see some saturation in growth but still grow faster than the overall market driven by expansion and new facilities, including the ground break on an Abu Dhabi facility.

Bombardier also tries to capitalize on the second-hand market with its CPO program where it basically takes an aircraft out of the market, refurbishes the jet with a new interior and the latest technology plus a 1-year warranty, and sells it at a profit. That CPO program is still in the early stages and will scale towards 2025 and beyond, which will help the business, but it will also provide a solid support to value retention for the Bombardier business jets allowing strong pricing on selling new jets. Bombardier already is positioned quite well when it comes to demand and pricing stability as it is active in the higher range of the business jet market, and the stronger value retention should also help secure orders for new jets. So, CPO serves as a profitable business in itself but also as a way to maintain strength in selling new jets to customers.

Earnings Bridge Shows Bombardier's Growth Drivers

What should be growing EBITDA significantly is new business jet deliveries with a volume-driven component as deliveries will go up from around 138 this year to 150 by 2025 and a margin component as Global 7500 will benefit from learning curve effects and improved pricing. Furthermore, there is the aftermarket growth where $500 million in growth can be realized with a margin of at least 20% driving 10% of EBITDA growth. There also is $70 million in cost reductions, driving 7.5% in EBITDA growth. So we see a lot of tangible components supporting the EBITDA growth. There are some pressures, namely pricing pressure net of inflation which previously was expected to be positive but now serves as an inflation buffer and the strategic investments to grow beyond 2025.

The solid earnings bridge supports the cash generation going forward and the continued deleveraging at Bombardier, and as the cash flow firms, the company looks to either start new projects, bring down debt further or even return value to shareholders all while maintaining a diligent balance sheet approach.

Is Bombardier A Good Buy Right Now?

I believe Bombardier's stock remains a great buying opportunity. The company is not taking excessive risk by hiking production and destabilizing the backlog, and they have a very methodical approach toward positioning the company for the future. At the time of writing, the stock is trading nearly 12% higher, and I can see why, because the Investor Day articulated the priorities, namely deleveraging and positioning the business for the future extremely well. Since I marked shares a buy, the stock price of Bombardier showed a 224% return, which is huge and is testimony to the transparent and diligent way the company is now run by management.

Conclusion: Bombardier Stock Remains A Buy

Bombardier showed a strongly improved forecast during the Investor Day while highlighting a risk-averse approach but with an eye for opportunities in the future, namely in the second-hand business jet market with its CPO program and the growth opportunities in Defense. The company is carefully assessing where they can deploy money for the best return on investment, and that is the way I like to see it. There is some margin pressure on guided EBITDA, but the reality is that EBITDA is still very strong given the inflation and supply chain challenges faced, and the company is looking at how it can extract more value from the same set of platforms as well. Those are all things that I like to see.

For further details see: