Bombardier still undervalued despite volatility

Morningstar analysts believe management will turnaround the company, and even at our conservative estimates, this five-star stock trades below fair value

Ruth Saldanha 12 November, 2018 | 5:00PM
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 Bombardier (BBD.B), the Montreal-based aircraft and train manufacturer, saw its stock fall over 20% last week after reporting its third quarter results last Thursday, where it posted a disappointing cash flow for the quarter and provided a weak outlook. 

Does this fall present a buying opportunity?

“Bombardier is definitely undervalued right now, but I do foresee some near-term volatility in the stock. Having said that, I believe that this is just a hiccup and the management will turnaround the company”, said Morningstar senior equity analyst Chris Higgins.

The stock closed Thursday at around $2.4 per share, well below Morningstar’s fair value estimates of around $4 per share.

The company also announced the next round of its restructuring plan, which included selling off some assets, as well as cutting 5,000 jobs. Bombardier plans to sell its aircraft training business and its Q400 aircraft line; the transactions should close second half of next year.

“I was a bit surprised at the decision to sell the aircraft training business, but I think it will impact more the hand-on aircraft training, and not so much pilot training”, Higgins said.

The job cuts are likely to drive $250 million of recurring savings by 2021, while the asset sales should net around US $900 million of cash.

“We think these developments indicate that management has picked most of the low hanging fruit as it fixes the business and that it may face deeper operational issues in its transportation unit. We've decreased our free cash flow projections and trimmed our operating margins for 2020”, Higgins said in an analyst note.

As a result, Morningstar dropped its fair value estimate by around 15%, but the stock still is undervalued. “Our fair value estimate is conservative, and is among the lowest on the street”, Higgins points out.

Bombardier has no economic moat as Higgins sees little evidence of Bombardier's intangible assets still acting as barriers to entry in the regional aircraft market. And Higgins also believes that Bombardier has exhibited poor corporate stewardship. The Beaudoin family’s control through a two-tier share structure, coupled with Pierre Beaudoin's chairman role on the board, makes the firm only partially accountable to shareholders, he notes. 

Bombardier manufactures transportation solutions, from commercial aircraft and business jets to rail transportation equipment and related services. With a home office in Montreal, it has facilities and 74,000 employees operating in 28 countries. 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Bombardier Inc Registered Shs -A- Multiple Vtg Conv85.97 CAD1.90
Bombardier Inc Registered Shs -B- Subord Vtg86.17 CAD2.28Rating

About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

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