Well I am back to writing about Bombardier, my last article was on July 16, 2015 when Bombardier’s stock (TSE:BBD.B) was at a 22 year low of $C 1.84 a share, and I thought it had hit rock bottom, having laid off up to 6,950 employees since January 2014 in 4 rounds and a 5th round of lay-offs is coming very soon.
Boy was I wrong ! as the stock today continued its downward spiral to $C 1.46 a share a drop of 62.1% from 1 year ago, so what in the world is happening at Bombardier, a further drop of 37% and it is a penny stock (< $C 1.00 a share). In February, 2015 the company raised $1.0 billion in new equity, offering a discounted stock price of $2.21 to new investors, that $1.0 billion equity investment is now worth $660 million (a loss of $340 million or 34% in value in 6 months-ouch).
The company is “burning” cash, $US 1.5 billion in the first 6 months, as work continues on CSeries and Global 7000/8000 programs, it raised $US 3.0 billion in new equity and debt earlier this year, it will all be gone by year’s end !
Bombardier is the world’s only manufacturer of planes and trains, with a total annual revenue of $20+ billion, evenly split between the two very different businesses. This fall will see Bombardier do an IPO of the Transportation business (trains) in Germany, to raise more cash to keep the Aerospace business going forward, yet it will surely keep a majority in the Transportation business, and most likely team up with Siemens of Germany to compete in the very competitive market.
Too much debt ($US 9.0+ billion) and not enough synergy between the 2 businesses, trains and planes. Look to Bombardier to do an IPO this fall in Germany on the Transportation side (trains), which could generate $5 .0 billion for 100%, but Bombardier will keep at least 51%, but up to $2.5 billion could be raised by 4th Quarter this year to fund the CS100/300 and G7000/8000’s to certification and entry into service. The stock will go up after that, it has lots of up side potential, if all goes well.
In fact, Macquarie Financial has lowered its target price for BBD.B stock to $C 1.00 ! yet Macquaire AirFinance, an aircraft leasing company with 136 jets ordered 40 x CS300’s for $US 3.14 billion last year ($US 78.5 million each), plus 10 options, what gives ? you do not order aircraft from an OEM that is struggling and an order book with less than 140 “real” orders.
The market capitalization (market cap) is now $C 3.25 billion, this is the market value of the company’s outstanding public shares (shares outstanding x share price), the company is now worth less than CAE Inc. at $C 3.99 billion and Westjet Airlines is not far behind at $C 3.0 billion.
The Enterprise Value (EV) is now only $US 10.27 billion for a company with $20+ billion in annual sales, EV/EBIT ratio is -12.54, while EV/revenue is a low 0.44, in short the company is greatly undervalued as many things are in trouble from the old Learjet line, current Globals, Challenger line, CRJ’s, Q400 and the never ending saga of the CSeries, to delivery issues in the transportation (train) business.
The product line of Bombardier Aerospace has been suffering for new orders, the Q400 (top left), Learjet 75 (top center) and the CRJ-900 (top right) are brands that are in their declining phase of their product life cycles, each barely competes with the new products currently out there or soon to be introduced (e.g. Q400 vs ATR-72-600, Lear 75 vs Citation XLS, G150, CRJ-900 vs E175-E1/E2). In fact the 1st half of this year only 7 x CRJ-900 were sold while 27 CRJ’swere delivered (book to bill ratio of only 0.25) while Embraer has 124 firm orders for its E-Jets (E1 and E2 models) this year already with 47 delivered (book to bill ratio of 2.64) ! says it ALL no ? it says a great deal about the attractiveness of the E-Jets vs CRJ’s, as the scorecard after the 1st half is 124 vs 7 ! or 17.7 to 1.
The Q400 has been outsold by ATR since 2010 on a ratio of 3.3 to 1, as ATR has captured 77% of the 48+ seat turboprop market, to only 23% market share going to Bombardier, again another casualty of the CSeries, the Q400 is loosing its appeal very fast.
The Declining Stage is defined by 1. low cost per customer 2. declining profit per sale 3. customers are laggards the objective now is to reduce price, sales promotion, expenditures and milk the brand. The only hope for rejuvenation is 1. major product improvement (e.g. Q400 Combi has been introduced-weight & balance a major issue 2. reposition perception (e.g. Q400 is best above 300nm, now trying to make it competitive on short routes-PW150 engine is double shp of PW127, cost, fuel burn, maintenance too high 3. new uses-maritime patrol, firefighter, pure freighter ?.
The Learjet, CRJ and Q400 brands have at best 3-4 years before they will be relegated to the history books, but for now Bombardier needs to milk them as much as possible, as sales are deteriorating even with normal price discounting of 30% to 45% ! All 3 brands are alive thanks to deep discounting at the expense of profit margins for the sake of cash-flow.
Yet, I see some light at the end of the tunnel, 1 year from now the CS100 will be in service with Swiss and production will rev up. The current stock price, I expect will go to $2.50 next year as orders will come in for the CSeries, maybe not the hundreds hoped for but enough to produce 120+ a year, which means break-even maybe in 2023 (my estimate is a minimum of 530 units over 6 years), just to recover the $US 5.3 billion investment in the CSeries, add in interest and surely more CS100/300 investment costs, and Bombardier could be looking at 700+ aircraft to break-even. The temptation is there to stretch the CS300 into a 160 seat CS500, that is the “sweet” spot, but it will be a major battle against Airbus A320neo family, Boeing B737Max family, Comac C919 and the Irkut MC-21 (aka Yak-242), hard to see the CS500 competing on price with the 2 oligarchs of the industry and then the Russian and Chinese government financially backed products, one needs very deep pockets for that, which Bombardier does not have at this time.
This deteriorating situation goes back to ex-CEO Pierre Beaudoin, who thankfully stepped down as CEO in February, but unfortunately remained as Executive Chairman of the Board, due to the fact the Beaudoin family controls 54% of the voting rights through a special class of shares. This ownership issue does concern investors, as few want to invest if they are going to be subordinate to the Beaudoin family that created the current crisis. Hopefully more investors will realize that the family needs to get out of the way, it is an anchor CEO Alain Bellemare does not need if he is to turn this company around, as it does keep possible new investors away.
The new CEO Alain Bellemare impresses me a great deal, he has done all the right thinks from bringing in Fred Cromer as Commercial Aircraft President as well as David Coleal at Business Aircraft, he has brought on new equity and debt to have the liquidity the market wanted to see and that he needs to get through the CS100/300, G7000/8000 certification, EIS and he is re-energizing Bombardier’s aircraft sales as the company has ‘neglected’ its product line while it was too focused on the CSeries on all fronts.
The latest crisis at Bombardier has come about from the July 30th announcement that the $US 75 million “game changing” (?) Global 7000 program is facing a 2 year delay, as the $US 75 million jet’s new advanced wing “is a challenge” and that there are some redesigns underway. Both the G7000 and G8000 will use the existing G6000 fuselage, stretch it and add larger windows that will extend higher up the side-wall, will feature new GE Passport engines and Rockwell Collins Pro Line Fusion avionics.
The aircraft will have a range of 7,300 nm and a large 2,637 ft3 cabin (23% more volume than current G6000/Global Express) that will feature 4 cabin zones, and was to be delivered a year from now, but now most likely early 2019, though they say late 2018. The$US 71 million G8000 will also be affected by the delay, as it will follow the G7000. The G8000 has a range of 7,900 nm and a cabin of 2,236 ft3 (only 4.5% more volume than current Global 6000/Global Express.
This comes on top of the news that the existing $US 52 million G5000 and the $US 62 million G6000 Globals are facing a production cut of roughly 30% from the 2014 production of 80 units to around 55 units, a revenue reduction of around $US 1.3 billion from the 2014 estimated Global revenue of $US 4.5 billion (roughly 43% of all Aerospace revenue, 60% of Business jet revenue from only 27% of aircraft deliveries). The Global revenue and margins have kept the aerospace side “alive” the past few years, now it is in trouble.
All of this comes at a time when the current G5000/G6000’s are facing an onslaught of new competition from the new Gulfstream 500, 600, 650 ER and the older 650 as well as the new Dassault 5X and 8X business jets. Like a deer frozen by head lights, Bombardier has yet to announce any “revamp” of the current Globals as it did with the Challenger 650 and 350, again too focuced on the CSeries. The new Gulfstream business jets are less expensive than the G5000/G6000 and much more fuel efficient, in fact on a 3,000 nm sector the G500 burns 23% less fuel (15,000 lbs) than the G5000/G6000’s and the G600 burns 19.5% less, the Bombardier Globals are losing their competitive advantage and by next year look for further G5000/6000 production cuts.
I said it many times, the Global is the “cash cow” of Bombardier Aerospace, the highest margins and if that segment goes bad, Bombardier will be in trouble, which the 1st half numbers for 2015 do not show, but the production reduction from 80 to 55 Globals per year says a lot. The G7000/8000’s were launched in 2010 and entry into service was to be 2016 and 2017, yet the program is about 2 years late and then add in the new 2 year delay, one is looking at 2019 entry into service at best, and 4 years from now the Bombardier G5000 and G6000 models will see their production reduced to less than 40 units as they will loose significantly to the Gulfstream G500/600/650/650ER and Bombardier has nothing to counter it but a ‘revamp’ of the G5000/6000 to hold down the fort while waiting for the G7000/8000’s.
We will see dramatic reversal of fortunes for the Bombardier Business aircraft division, which until now was a very strong performer and competitor, providing Bombardier with some positive news, profits and cash-flow. The last news on the G7000/8000 sales success was 62 orders (apparently about 70% of orders are G8000’s) for a net delivery value of around $US 4.5 billion
Bombardier total revenue for 1H/2015 was $9.017 billion (-2.46% on 1H/2014), and only $225 million in net income (2.5% margin), but worst was the fact the company burned through $1.553 billion in free cash flow (FCF), having just raised over $3.0 billion in debt and new equity in early 2015 to shore up its cash reserves for the CSeries and the Globals.
The present balance sheets shows $3.1 billion in cash and equivalents and $1.3 billion in trade and other receivables and $505 million in ‘other’ financial assets (for $4.8 billion), while it looks impressive, at current pace the company will burn another $1.5 billion by year’s end.
Current financial situation is NOT good at Bombardier, for instance debt is very high, with long term debt at $9.03 billion for a company capitalized at only $3.03 billion ! debt to equity is 6.25 and leverage ratio is 45.90 as liquidity is a major concern, a comparison is worthwhile here with other aerospace companies:
Boeing: debt to equity of 1.44, leverage ratio of 14.65
Honeywell: debt to equity of 0.53, leverage ratio of 1.51
Lockheed Martin: debt to equity of 2.82, leverage ratio of 12.36
This is why Bombardier’s stock is at its lowest since 1993, as P/E (price/earning) TTM (trailing twelve months) “earnings multiple) is at -1.44 x, in short very much undervalued.
Meanwhile, Boeing’s P/E-TTM is 19.8 which is very good and over-valued due to strong earnings growth as is General Dynamics (18.5), Honeywell (19.1), Lockheed Martin (18.7).
This explained again by looking at the highlights of the first half.
The business aircraft division has so far delivered 92 aircraft (14 x Learjet 70/75’s, 32 x Challenger 350’s, 8 x Challenger 605’s, 37 x Global 5000/6000’s and 1 x CL950) for a value of $3.352 billion, up 8% on 1H/2014 figures in revenue and up 13.5% on units delivered.
The BIG problem is that while 92 aircraft were delivered in the first 6 months only 27 new orders were received, a book to bill ratio of 0.29 ( 3 orders for each 10 deliveries-ouch), this is very alarming indeed, more are being delivered than sold, backlog is diminishing as orders are down 65% ( 27 from 76 in 1H/2014).
Obviously with the 30+% decrease in Global production, the Globals are seeing a very softening in demand, this is a very bad situation indeed, as now the Global 7000 will NOT be ready till late 2018 at best which means the 8000 at best in late 2019, by then Bombardier WILL lose the ultra-long range market leadership to Gulfstream Aerospace for sure.
The new $US 44 million Gulfstream G500 (above left), the $US 55 million G600 and the $US 58 million Dassault Falcon 8X (above center) were designed and positioned to take on the $50 million Bombardier Global 5000 (above right) and $US 60.5 million G6000, all 3 are less expensive to buy and up to 23% more fuel efficient. The Global 6000 is a ‘rebranded” Global Express XRS which dates back to 1993, while the G5000 (BD-700-1A11 model designation) came out in 2003 and is a 32 inch or 80 cm shortened version of the Global Express XRS with a 5,500 lbs lower MTOW and therefore 1,200 nm less range and is $US 11 million cheaper than the G6000, range is a determinant in price, more range equals more money, the ultra long range market is about cabin size and range.
The new G7000 and G8000 will use the existing G6000 fuselage (which is the Global Express XRS fuselgage), and stretch it, put GE Passport engines on it, new Rockwell Collins Pro Line Fusion avionics and bigger windows and raise range by 1,350 nm over the existing G6000, that is not a “game changer”, just and evolution of an existing aircraft, the G6000 and add $US 14.5 million to the price. They did the same with the Challenger 300 to 350 and 605 to the 650, bigger windows, a little more range, new avionics and upped the price by $US1.0 to $US2.0 million and had a “NEW” aircraft to offer on very minor changes and development costs.
Bombardier is very good at stretching aircraft, 37 seat DHC-8-100 to 50 seat DHC-8-300 to 84 seat DHC-8-Q400 and they took the 12 seat Bombardier Challenger business jet, and stretched it into the 50 seat CRJ100/200, then the 70 seat CRJ-700, then the 82 seat CRJ-900 all the way to the 102 seat CRJ-1000.
The Globals are Bombardier Aerospace “cash cow”, it produces the highest margins, and with 80 deliveries in 2014, it generated $US 4.5 billion in sales (43% of Aerospace revenue in 2014), but the softening of this ultra-long range segment and the new competition, has forced Bombardier to reduce production by 2014 by 30% to only 55+/- units, an annual loss of $US 1.4 billion in sales at a time Bombardier needs that cashflow for the new $US 75 million G7000 and the $71 million 8000 aircraft programs, to stay on top on this segment. The 2 year delay in the G7000 will see the Global brand over taken by Gulfstream’s G650, G650ER, G500 and G600 line.
General Dynamics the parent of Gulfstream Aerospace reported 20.4% margins at Gulfstream 1Q/2015 and its sales are very strong the best in years with book to bill ratio this year over 1.0 as 58 G450/550/650’s are delivered in the 1st half of this year. The US market is particularly strong for Gulfstream and we are seeing a strong demand for the Gulfstream line in the US market, especially the new G500/600’s which have deliveries planned for 2017 and 2018.
The last time I checked (Oct/2014) the ultra-long range jet market (excluding commercial derivatives – BBJ and ACJ) stood at 1,525 units strong, between Gulfstream, Bombardier and Dassault. Now, the commercial VIP jetliners out there from Airbus and Boeing today (as of March, 2015) stand at 389 units out of 411 orders. These are the biggest VIP aircraft on the market, that can range from $US 15 million for an older VIP B737-500 up to $400+ million for a B747-8. So in total we have around 1,914 ultra-long range jets and commercial VIP airliners in the world today, this is the market for the new G7000/8000 as well as the 1,645 billionaire sin the world at last count.
Presently, Boeing VIP aircraft in service total 177, or 45.5% market share (11 x B737, 143 x BBJ, 5x B757, 8 x B767, 5 x B777, 1 x B787, 3 x B747-400 and 1 B747-8). While there are 188 Airbus (54.5% market share) aircraft in VIP service (18 x A318, 67 x A319, 25 x A320, 22 x A310, 36 x A330-200, 13 x A340-200/300, 7 x A340-500/600)
The leader is Gulfstream with 731 units in service (191 x GV, 9 x G500, 455 x G550, 76 x G650) or 48% market share. Number #2 was Bombardier, with 572 units in service (158 x Global Express, 166 x Global 5000, 159 x Global Express XRS, 99 x Global 6000) or 37% market share. In #3 position is Dassault with 222 Falcon 7X’s in service with a 15% market share, and has high hopes for its new 8X obviously to change that.
Look for negative numbers in the business jet business at Bombardier, with a book to bill ratio in the 1st half of this year of only 0.29 (27 orders/92 deliveries), there is a big trouble looming for this division, look for layoffs later this year again, and a drop in revenue, cashflow and net income, so both Commercial and Business aircraft divisions will greatly under perform in 2015 and 2016.
The current $US 22.2 billion backlog in business jets is highly suspicious to me, but at 2014 production rates which generated $US 7.5 billion in revenue, it equates to only 36 months of production, and at a book to bill ratio of 0.29 that equates to only $US 6.4 billion in new orders, so without many new orders, at best 46 months of production (at 2014 levels), and I see no light at the end of that tunnel for now.
The Learjet 70/75 is dying, the Challenger 650 is mediocre now, the Challenger 350 is doing well, and the Global 5000/6000 will see and is seeing its market position deteriorate and an uncomfortable rate. The delay in the Global 7000 and the Global 8000 is a huge blow for the business jet division and for all of Bombardier Aerospace, this cannot be underestimated.
While Bombardier is struggling with new orders (book to bill of o.29), Gulfstream recorded the best 2nd Quarter in sales since 2008, and dismisses Bombardier’s talk of a softening market as “speculation” and “rumour intelligence”, as its order book grew by $1.0 billion this year already and a book to bill ratio exceeding 1.0 and in the 1st half of this year has delivered 73 aircraft, of which 58 (79% of total) being the high end G450/550/650’s, with total delivery value of $US3.971 billion (+14.7% higher than BBD) vs $US3.46 billion for Bombardier 1H/2015.
Last year Gulfstream delivered 117 high end G450/550/650’s vs 80 G5000/6000’s by Bombardier. In Bombardier’s defense, the market is “softening” globally, China is way down to a crack down on corruption and a slow down in the economy, Russia’s economy suffers from oil price collapse, sanctions over occupation of Crimea and the fall of the Ruble, while the US is doing reasonably well, and that is where Gulfstream does well, its home market, with Fortune 500 companies.
The commercial aircraft side is even worst, with 42 deliveries made in the 1st half of 2015 BUT only 28 orders were received for a book to bill ratio of 0.67, while 63 orders were received in 1H/2014. The only orders were 7 x CRJ900’s for Mesa Airlines (USA) and 13 x Q400’s for Chorus Aviation (Canada) and 10 options.
The backlog in the commercial aircraft is very grim, only 76 CRJ’s (8 x CRJ-700’s, 40 x CRJ-900’s and 28 x CRJ-1000’s) and 41 options, so based on 5 CRJ’s per month, current backlog is good for 15 months on firm orders and 24 months if all options are exercised.
The Q400 backlog stands at 51 firm orders and 81 options, so based on 2 Q400’s per month, current backlog is good for 25 months on firm orders and 66 months if all options are exercised, which seems very unlikely for the Q400 as it cannot compete with the ATR-72-600’s economics and wide appeal today. Even CEO Alain Bellemare said “the Q400 is sometimes too much aircraft”, so true, it was designed to be at its best between 300-400 nm between the Q300 and the CRJ’s. The PW150 engine is over kill today, the ATR-72 is fine with the PW127, maybe a scaled back “Q350” that will be powered by PW127’s and cruise at 275 kts like the ATR-72-600 ? because right now in the 1H/2015 the Q400 has received only 1 new order for 13 Q400 from Chorus Aviation plus 10 options that is all, in fact since 2010 the Q400 has managed only 23% market share in the turboprop market, being outsold by ATR 3.3 to 1.
Either way, the Q400 has just seen it’s 500th unit delivered and now the second hand market is active and competing with new Q400’s. The aircraft’s $US 33 million price is already discounted 30-50%, and still it suffers with new orders.
The CSeries stands at 243 orders, but as I have said in previous articles, realistically the order book stands at around 140 at best, with many HIGHLY questionable customers that are very risky from a viability point of view and political point of view.
The aircraft now has a range of 3,300 nm, a 350 nm improvement thanks to 1% less fuel burn from the engine than planned, less drag then estimate don the airframe which means Bombardier can increase maximum takeoff weight by 5,000 lbs.
There is light here, the aircraft, CS100 and CS 300 are very good aircraft and they will sell in their 110-149 seat market, but it will not be in large numbers (not the 7,000 units in 20 years that Bombardier ‘hopes’ will be ordered in this segment), the segment is not what it once was, up-gauging in the global market makes this segment much smaller, look at the poor B737Max7 and A319neo orders here, and its not because they are not economical enough or as Bombardier says “inefficiency of the shrunk version”, it is that the market demand in this segment is just not what Bombardier “hoped” for, using historical data to estimate the future demand was a big mistake, the world air transport market has changed.
In closing, I am going to BUY Bombardier stock, yes, I believe it is so low that it can’t go too much lower and yet it can go much higher, lots of up-side potential as the CS100 nears certification, IPO of Transportation Division, new CS100/300 orders and the hopeful stepping down of the Executive Chairman of the Board, Mr. Pierre Beaudoin.
Then step by step, smooth, trouble free CS100 entry into service with Swiss, CS300 certification and entry into service with launch customer airBaltic (??), revamp the current G5000/6000’s to hold the line for 4 years, and focus on the G7000/8000’s quick entry into service, new replacement for Challenger 650 needed next 5 years, while knowing when to bow out with the CRJ and Learjet line, and re-position the Q400 to better compete with ATR-72-600.
I think this has been the most positive article on Bombardier I have written, but to those that read my blog, everything I have warned about and criticized has come through, I was calling for Pierre Beaudoin’s departure for sometime, and now CEO Mr. Alain Bellemare is doing everything I would do, and therefore I am hopeful for Bombardier, because he is doing all the right stuff, just needs time for CSeries orders, but yes its all nerve racking.
Thank you as always, till next time, cheers.