Bombardier Stock: A Strong Business Jet Buy (OTCMKTS:BDRAF)

Since October 2023, I have a strong buy rating on Bombardier stock and that rating has performed well with the stock appreciating 51.6% compared to the S&P 500 returning 24%. In February 2024, Bombardier stock tumbled as its free cash flow guidance for 2024 came in below expectations. However, I reiterated my strong buy rating for Bombardier shares and on a nearly flat market the stock returned 30.4%. So, the buy ratings have performed extremely well. As Bombardier has reported its first quarter earnings, I am revisiting the stock to see whether the company’s performance leaves any room for further upside in the stock prices.

Bombardier Challenger Mix And Volume Drive Revenues Down

For the first quarter, revenues declined from $1.45 billion to $1.28 billion. I don’t recall the last time I saw quarterly revenues decline for Bombardier, but I am also not extremely worried about the decline. Aftermarket sales grew 12.5% to $477 million and the revenue decline was primarily caused by deliveries falling by two units while the revenue mix was more tilted towards the smaller Challenger business jets.

There are some supply chain constraints, which force Bombardier to build jets for which they have parts and for which the hold ups are less. So, a softer quarter year-on-year is not extraordinary. Furthermore, the delivery profile like last year remains backloaded so the first quarter is not a reflection of how the remainder of the year will look like in terms of deliveries.

Adjusted EBITDA declined by $7 million or 3.3% reflecting the lower revenues. However, the lower revenues were partially offset by better margins. Adjusted EBITDA margins grew 140 bps to 16% while adjusted EBIT margins grew 160 bps and if you are not so much into adjusted earnings figures it is good to note that reported EBIT increased as Bombardier had a continued strong cost execution.

The strong EBIT figures did not translate to the net income level and that was driven by lower $69 million lower tax recovery and $40 million lower financing expenses being more than offset by $167 million lower interest income. Free cash flow usage for the quarter was $387 million indicating a $140 million expansion year-on-year. The free cash use expansion mostly reflected the lower interest income while Bombardier continued investing in inventories as it prepares to ramp production throughout the year and deliveries towards the end of the year.

Other highlights were the 1.6x book-to-bill ratio signaling strong and continued demand for Bombardier’s products while bookings were up 60% compared to last year and the backlog now stands at $14.9 billion.

Bombardier Maintains Guidance For 2024

Bombardier has not changed the guidance that it provided earlier this year. Back then, the guidance was not well received by analysts and investors as revenue estimates were in line with the guidance, but the 2024 guidance provides quite a challenging prospect for its EBITDA margin objective of 18% by 2025. It remains to be seen whether that margin objective remains on the table during Bombardier’s Investor Day on the 1^st of May. The free cash flow guidance did raise some concerns, but I believe stock prices recovered after it became clear that the free cash flow guidance reflected continued investments in working capital to allow for higher productions through 2025.

Bombardier Stock Remains Extremely Attractive

I have processed the balance sheet data and forward projections for Bombardier stock and remain undividedly bullish on the stock. Bombardier has successfully turned around from a company that did a lot but wasn’t really excelling in anything particular to a company that excels in business jet production where it is able to harvest the financial rewards of its design excellence. Furthermore, the company is also growing its aftermarket services which provide long-tail and predictable revenue opportunities while there are opportunities in refurbishing pre-owned jets under the Bombardier flag and Bombardier’s jets can be used as platforms for defense products.

So, there is a lot to be positive about and the 16% upside I see for Bombardier matches that with even more upside possible by 2025 as inventory investments taper.

Bombardier Faces Risk Of Softer Demand

There are several risks that Bombardier faces. On supply side, continued supply chain constraints might result in the company missing its delivery target or require an increased level of inventories to reduce the risk of missing delivery targets. Currently there is no indication that Bombardier will be missing its delivery target but it is a risk that does exist in the current environment for aerospace products. Furthermore, the business jet indicator has been below the stability threshold level since Q1 2023 while we also see an uptick in total pre-owned business jet inventory which can be seen as an indicator of softening demand. Those indicators are important to keep in mind but also to put them in context. During the pandemic, demand for business jet travel was higheras airline travel was either not possible or not favored driving some travel towards the business jet mode of transport. Furthermore, we do see that pre-owned businesses jet inventory for the large business jet segment is actually declining and Bombardier is active in that market segment. So, it is not all bad. We are simply seeing some normalization.

Conclusion: Bombardier Has A Bullish Future

The first quarter results were not extremely strong when viewing things through a lens of lower volume. However, margins ticked up despite lower volume which shows that the company is performing extremely well on the end of cost management and as it climbs the learning curve on some of its newer programs there likely is upside to margins while I also expect that continued growth in the aftermarket sales will also help to expand margins. I am curious to see what the company will be presenting during its Investor Day, but I remain very bullish on Bombardier’s prospects.

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