We’ve reduced manufacturing stock Bombardier’s quality rating further, to ‘Higher Risk’. That’s because it faces significant risks. But the shares could rebound if the company does better than expected. It remains a hold if you need no dividends and can accept ‘Higher Risk’.
The Investment Reporter ’s Investment Planning Committee has again cut the quality rating of Montreal-based manufacturing stock Bombardier Inc. We now rate it ‘Higher Risk’. This manufacturer of planes and trains remains a hold for big potential gains. But only if you need no dividends and can accept holding a stock we rate Higher Risk.
Bombardier faces a number of risks. The main one is a lack of orders for its C Series aircraft. The company last won an order in September, 2014, or almost a year ago. This reflects several factors.
First, big competitors Airbus and Boeing are successfully defending what they regard as their ‘turf’. Airbus, in particular, is flogging its aircraft at lower prices than Bombardier’s C Series aircraft. That makes it harder for Bombardier to land new orders.
Bombardier is so far winning few orders
Second, Bombardier’s balance sheet is in a fragile state. This means that it’s constrained in its ability to provide financing to its customers. That’s important because some of the company’s customers are in poor financial shape. Some may have little choice but to defer or cancel their orders.
Third, given that Bombardier is ‘burning’ through its cash quickly, its balance sheet is unlikely to improve anytime soon. The company’s C Series aircraft is two years behind its initially-scheduled entry into service. It has also cost about $2 billion more than originally envisaged.
A second risk is that of Bombardier becoming a ‘penny stock’. These are stocks that trade for under a dollar a share. This can lead the Toronto or New York Stock Exchanges to de-list the shares.
To deal with very low share prices, companies sometimes consolidate their stock. For instance, shareholders might get, say, one new share for every 10 old shares. This can raise the share price and buy the company time. But usually the shares fall again, particularly if the company can’t fix its problems.
At the same time, Bombardier’s fortunes may soon improve. Its CS100 jet is on track to become certified this year. The aircraft will start flying in 2016. At that point Bombardier will have the actual product to sell. With significantly lower operating costs and noise, sales of C Series aircraft could pick up.
When little is expected of a company, the shares can jump if it beats these low expectations. Little is expected of Bombardier these days. An upturn in its fortunes could send the shares up. This could easily lead to triple-digit gains.
Bombardier Inc. (TSX—BBD.B) remains a hold—if you need no dividends and can accept holding a manufacturing stock that we now rate ‘Higher Risk’.
The Investment Reporter , MPL Communications Inc.
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