October 29, 2015

The S&P 500 was about even and Toronto was down 0.5%.

Constellation Software was up 4.8% after releasing a strong earnings report. Like I mentioned yesterday, some companies just seem to always be on their game.

Bombardier made the news with a U.S. $4.9 billion dollar loss. To put that in context a report yesterday indicated that the entire Canadian oil sector would lose Canadian $2.1 billion in 2015. In fairness that $2.1 billion must exclude write-offs but still Bombardier has posted a truly mammoth loss. (It’s world-scale really.) Most of it is in the form of write-offs of money previously spent on the C-Series plane and, while they were at it, $1.2 billion for new line of Learjets that they have now scraped.

In rough numbers, Quebec will own half of the C-Series program. Quebec is paying $1 billion for its half. Bombardier will have paid at least $4.2 billion for its half and it may be more like $6 billion. Some people say governments are bad investors. Clearly they are not as bad as Bombardier.

This does not look like much of a gift from Quebec. Rather it looks more like it could be an astute investment. But that remains to be seen.

This investment by Quebec leaves Bombardier to live on, and at least be able to pay its bills as they come due. The company brags of its $2.3 billion cash. I find that to be less than comforting when I see that their cash plus accounts receivable is somewhat lower than their accounts payable. This $2.3 billion does not exactly look like surplus cash to me.

They also go to brag or at least attempt to reassure investors by pointing out that they have $1.3 billion in available credit facility. To me this looks similar to someone with no cash pointing out that they still have “room” left on their credit card.

In any case they are able to move forward and hope for better times ahead.

One thing that this massive write-off will do is make their profits look a lot better when they ultimately do start delivering planes. Previously they would have been expensing say $6 billion in program costs and spreading that cost across the future plane sales. Now that should be more like $3 billion spread across future plane sales. I am not sure what kind of percentage reduction in costs per plane that leads to but it will surely be a material amount. This is sort of accounting trickery as they have just booked $3.2 billion in development costs  today which reduces the amount to be booked in future and makes the reported profit per plane higher in future. (Or turns what would have been losses into profits) Trickery or not, it is legal, even required accounting and if they can start reporting profits on these planes the market will lap that up.  Bombardier will surely have a better year in 2016.

I am not clear if they revealed whether or not the early plane sales will now be reported as profitable given this write-off. Without the write-offs I understood the planes were going to result in accounting losses in the first few years of sales. (Which is normal in this tough industry) Either way the delivered planes will surely result in cash flow gains on sales before deducting amortization of development costs.

Clearly Bombardier remains a highly speculative investment. Hopefully the bad news is out of the way for now and the next news such as some new sales contracts and then the certification and then the delivery of planes in 2016 will cause at least some recovery in the share price. There is also the planned sale of part of the Transportation division. Hopefully not at a fire-sale price.