Shares of Montreal-based Bombardier Inc. (BBDb.TO) recently popped higher by 60% on a lucrative Chinese offer to buy its transportation division (BT), which was responsible for 48% of its 2014 revenues. The reason the offer was rejected may have been political as Canada enters election season and a Chinese takeover may not have been viewed kindly.
Bombardier is still planning to raise cash by listing a minority stake in BT; clearly, the company is in need of a cash infusion as it ramps up its new C-series plane production. Bombardier does poorly on the StarMine Earnings Quality model with a score of 8, which indicates that the earnings may not be coming from sustainable sources. Let’s dig in.
Source: Eikon/StarMine
Stalled cash flow
Bombardier generated negative few cash flow in the last three years, and despite reporting a positive net income in the last 10 quarters, the company has reported negative free cash flows in eight of the quarters. In each of the last two quarters, Bombardier reported negative free cash flow of -$749 million and -$815 million.
Analysts are worried about the poor cash flows and have voiced their concerns about the ability to sustain the investments without raising new capital. While setting an initial public offering for the BT division may help raise some cash, that may not be enough given the capital-intensive process of building a new C series of aircraft. If the company does turn to the equity markets for additional funding, that could be dilutive to the current shareholders. Bombardier’s debt is rated B by S&P which means that the company may have to pay a high yield to get funding from the bond markets.
Source: Eikon/StarMine
Hitting some turbulence
As you can see in the chart above, Bombardier scores poorly on most of the StarMine models. Analyst sentiment looks weak, the stock has poor price momentum and our credit models indicate that the company’s balance sheet may be stretched. It is also not likely to be high on the radar for institutional investors. Revenues in the last quarter were lower than a year ago by 5.5%, which could signal a slowdown in the industry.
Source: Eikon/StarMine
Stormy weather?
Bombardier has seen a slowdown in orders, and its solution is the new C series of aircraft. The company has almost completed testing and the plane could go into production soon. However, as with any new aircraft, we will see a large capital investment, and it remains to see if the C series can deliver the margins and returns that Bombardier expects. Those will be a few years away, and in the mean time, Bombardier earnings quality looks weak, and the company will need to raise cash to support operations.
