Bombardier: Outlook improves on Delta deal

We plan to increase our fair value estimate for the troubled jet maker, but expect further volatility.

Chris Higgins, CFA 28 April, 2016 | 5:00PM
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Chris Higgins: Bombardier reported first-quarter 2016 results and announced an order from Delta for 75 CSeries jets, with options for 50 more. This order does two things for Bombardier. First, it shores up demand for the CS100 variant, which was basically on life support. Second, it provides a stamp of approval, which means that more of the CSeries options should convert to firm orders, securing the future of this program past 2020. The order, however, does not change the underlying economics of the CSeries program, and we still expect significant cash burn and earnings dilution as the program ramps up.

Management reaffirmed its 2016 revenue guidance of around US$17 billion and EBIT before special items of US$300 million. But the special items keep piling up, including an anticipated US$500 million CSeries provision to be taken later this year. We expect the company to burn more than US$1 billion in cash during 2016, due primarily to the CSeries.

We had previously flagged the Delta order as a strong possibility and raised our fair value estimate. Now that the order has materialized and the CSeries is on firmer footing, we plan to raise our fair value estimate again. Despite this increase, we expect the stock to remain volatile and note our very high uncertainty rating.

Going forward, we will be watching to see if the Air Canada letter of intent for 45 aircraft is firmed up and how talks with Ottawa unfold, particularly since management’s new tone indicates that they may not require additional cash from the government. Finally, we will be tracking progress on restructuring measures, which entails headcount reductions of around 7,000 employees through 2017.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Air Canada Shs Voting and Variable Voting16.93 CAD-0.24Rating
Bombardier Inc Registered Shs -B- Subord Vtg89.56 CAD4.05Rating
Delta Air Lines Inc49.38 USD-0.46Rating

About Author

Chris Higgins, CFA

Chris Higgins, CFA  Chris Higgins, CFA, is a senior equity analyst for Morningstar.

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