BDRBF - Bombardier: Uncovering Hidden Value In An Undervalued Gem

2023-10-27 15:45:24 ET

Summary

• Bombardier stock has underperformed the broader market, losing 17% of its value year to date.
• Analyst estimates for Bombardier's third quarter have come down, with a decline in revenue and earnings per share.
• Despite the stock decline, Bombardier is undervalued and remains a strong buy, with significant upside potential.

Since I marked Bombardier (BDRBF) stock a buy, the stock has soared, doubling in value compared to a flat market. The increase in stock price comes at a time the company has refocused its business and is on a successful deleveraging path. However, since my most recent report nearly a quarter of the stock price has evaporated and now trades around 30% below its highs. In this report, I will be discussing whether a change in analyst estimates is the reason or whether this provides a compelling entry point for investors.

Bombardier Stock Underperformed Year-to-date

Year to date, Bombardier stock has underperformed, losing 17% of its value compared to an 8% gain for the broader markets. There's no clear reason to be found in the previous quarterly results , but it's highly likely that there are some concerns about growth being as robust as we have seen in recent quarters added to the continued risk of any softening in demand. Being a business jet play, Bombardier heavily relies on continued strength of said market as well as orders that have a significant impact on cash flow at the time of order contrary to commercial airplanes where cash flow materializes more gradually after an order is placed.

What Are Analysts Expecting For The Third Quarter?

For the third quarter, analysts are expecting revenue growth of 20% bringing the revenues to $1.75 billion, but we do see that over the past months the estimate has come down. In the last six months, the revenue estimate has been brought down by 5.8% while the stock lost 41.3%.

Looking at the estimates, we see that over the past six months the earnings per share has come down by nearly 10% to $0.46. Given that the company tends to trade at 7.5x earnings one could multiply the percentage decline in EPS by the earnings per share and conclude that the stock price decline is justified. However, that does not quite hold given that these are just the estimates for one quarter ahead.

What Is Bombardier Stock Worth Based On EPS Projections Using P/E Method?

Using the P/E ratio of approximately 7.5x as well as the EPS estimates, we see that highs seen earlier this year priced in 2025. Indeed, if you're looking for stocks that purely reflect current year earnings, Bombardier stock is still overvalued but it's quite common for companies to trade a year or two ahead of earnings, and in that regard, the company is undervalued by 9% against 2024 earnings and even 69% measured against 2025 earnings.

What Is Bombardier Stock Worth Based on EV/EBITDA Method?

A significant change in estimates could possibly provide an explanation for the reduction the share price. However, it's evident when looking at the EBITDA estimates that's not the case. In fact, the estimates became slightly more positive.

Free cash flow estimates have come down by 1.1% for 2023 and 1% through 2025, but that also does not provide a strong base for a reduction in share prices.

I added the balance sheet data and forward projections into my model, and even at the company EV/EBITDA median multiple which is lower than that of the industry, we see that the company is undervalued with 2023 earnings in mind providing 40% upside with a $43 price target and 76% undervalued with a $54 price target. So, unless I'm missing something big Bombardier is significantly undervalued. In fact, applying the industry EV/EBITDA median would even provide more than 140% upside.

What Are The Risks For Bombardier?

I believe that Bombardier is on a strong deleveraging path that creates value for shareholders and the only straightforward risk is any weakening in demand for private jets. The business jet indicator which measures market confidence shows that this year the confidence has dropped below the stability threshold and while that does not mean that Bombardier will not find customers for its airplanes it could potentially point at some challenges on getting a book-to-bill ratio of 1 which provides a tailwind to free cash flow.

Conclusion: Bombardier Remains A Buy, A Strong Buy Even

I have analyzed the estimates and the most recent results and there's little reason for the stock losing around 30% off its highs. The company is working on a compelling turnaround and the retreat in share prices has made the investment case for Bombardier even more compelling with the only risk being a potential softness in demand for business jets but I have not seen any management comment that strongly points in that direction.

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