Bombardier update August 27, 2016

Our report on Bombardier is updated and the stock is rated Sell at $2.05 Canadian. (Our report converts that to U.S. $1.58 because the company reports in U.S. dollars).

Our last update was on October 29,2015 when we rated Bombardier a Highly Speculative (lower) Buy at $1.42 Canadian. A lot has changed since then. At that time Bombardier was still profitable on an adjusted basis. Now it is not. And it has now projected that it will not be cash flow positive until about the year 2020. And it was not clear if there would be accounting profits until then either, even on an adjusted basis. The share price is also higher now. Investments that Bombardier has received from the Quebec government and the investment arm of the Quebec government probably make it less likely that the company will go under. But these investments also require that any future profits be shared with Quebec reflecting its investment.

At this time considering all the factors, it seems that the appropriate rating for this stock is “Sell”. I plan to sell some of my position immediately but I may place an order to try to get a higher price for some of the shares as it can always bounce up on good news. I may deploy some of the cash received into Bombardier pref shares, which I consider a better investment (see below).

It’s interesting to think about how shares that have a book value of NEGATIVE U.S. $1.81 or Canadian negative $2.36 can trade at positive $2.05. Firstly, most companies trade for their earnings not their asset book values. Asset values can place a FLOOR on share values but seldom a ceiling. However, Bombardier has negative earnings and this could continue for some time. But common shares always have a floor price of zero. If the company loses MORE than all the common equity then debt holders and credits share in the loss. Common shares never go below zero. As long as a company has not actually gone bankrupt there is usually some non-zero chance of earnings eventually returning or someone buying out the shares. In the case of Bombardier it appears that the share price is partly a reflection of estimates of future earnings and perhaps partly a lottery ticket sort of premium for the small chance that it could someday be a very profitable company. Overall, at the moment the market may simply be paying too much for these shares. The marginal buyer of these shares may be over estimating future earnings. Investors are probably confident that the company will sell C Series planes. They may be less aware that the sales will likely be at a loss for about the next five years.

Our report on the Bombardier Series 4 preferred shares is also updated and rated Highly Speculative Buy at $17.25. While the company is very weak, it appears likely it will continue to pay the dividend on these shares.