Report
Chris Higgins
EUR 850.00 For Business Accounts Only

Morningstar | BBD.B Updated Star Rating from 09 Nov 2018

No-moat Bombardier hit some heavy turbulence as it navigates its ongoing turnaround, posting disappointing cash flow this quarter and providing a weak outlook. The company also announced plans to sell more assets and unveiled another round of restructuring that it thinks will drive $250 million of recurring savings by 2021. However, management didn't lift its 2020 margin target of 8%. 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. Our new fair value estimate stands at CAD 4.05 down about 15% from our previous valuation. Despite the cut, shares look undervalued.

The transportation business is driving the cash flow weakness at Bombardier and although management puts almost everything down to timing, we're concerned that there may be some operational issues to address. Management's breakeven 2018 free cash flow target previously excluded the $600 million sale of Downsview but now incorporates it, which implies a substantial cut was made to 2018 cash flow guidance. Excluding Downsview, we were forecasting $100 million of free cash flow for this year but now we are at negative $660 million.

In a move that should net $900 million of cash, Bombardier plans to sell its business aircraft training activities and its Q400 aircraft line; the transactions should close second half of next year. If the CRJ aircraft line isn't shutdown first, we think it will be next on the for-sale list. Guidance for 2019 excludes business aircraft training and the Q400--which we estimate generate a combined annual operating profit of around $100 million--starting in the fourth quarter of 2019. Management targets basically no growth in cash flow next year with a breakeven midpoint bounded by a range of negative $250 million to positive $250 million.

For 2019, management sees 10% revenue growth driven by the introduction of the Global 7500 and the transportation business converting backlog into deliveries. This growth implies about $18 billion of revenue, noting we're actually a bit below $18 billion for next year. The company anticipates operating profits to grow at roughly double the rate of revenue in 2019, indicating expectations for margin expansion, which should be driven by the transportation and aerostructures businesses. That said, business aircraft activities will face about 100 basis points of margin contraction next year as the Global 7500 ramps; Bombardier is targeting 15-20 deliveries of the new business aircraft.

The free cash flow guidance for 2019 includes $250 million of non-recurring restructuring cash charges plus a contingency for $250 million for working capital at the transportation business. If we assume the $600 million cash flow guidance miss this year was related to working capital and that most of it should release next year, then the 2019 cash guide looks weak. We think this calls into question whether there are operational issues in the transportation activities that still require attention.
Underlying
Bombardier Inc. Class B

Bombardier is a manufacturer of transportation equipment. Co. carries out its operations in four segments. Aircraft is engaged in the design, manufacture and aftermarket support for three families of business jets (Learjet, Challenger and Global). Commercial Aircraft designs and manufactures commercial aircraft in the 60- to 150-seat categories and provides aftermarket support for these aircraft as well as for the 20- to 59-seat range category. Aerostructures and Engineering Services designs and manufactures aircraft structural components and provides aftermarket component repair and overhaul. Transportation delivers products and services in sustainable mobility.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Chris Higgins

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