December 18, 2016 Bombardier comment and Alimentation Couche-Tard updated

On Friday, the S&P 500 was down 0.2% and Toronto was up 0.2%.

Bombardier had a good day, up 5.1% after holding an “investor day” in New York last week and also providing some updated forecasts.

I am not a fan of such Investor Days since, even when webcast, they provide an advantage to investors present in the room or at least able to listen online. The reason earnings are reported after the close of trading is to eliminate such advantages. Putting out any kind of news or updates during the trading day disadvantages the retail investor.

One of the announcements was that Bombardier will pay $90 million to cover obligations under residual value guarantees for 76 CRJ200 planes owned by Skywest. Other news was that Bombardier hopes that it can begin to sell some C Series planes without the massive (think at least 50%) discounts at which it has so far sold those planes. These items illustrate just what a truly ugly business the manufacturing and sale of commercial jets is: It requires huge investments. Your competitors may be subsidized by governments. You have to discount massively. You may need to help your airline customers finance the purchase which is risky given that airlines typically or often have terrible credit ratings. You have to guarantee the residual or resale value of the planes after the end of their service lives. The product liabilities are likely massive in the event of a technical problem causing a crash. Other than this though, it is a great business to be in! I mean I wish Bombardier the best. I’d love to have a Canadian company be a world leader in this field. The problem is that it is just undeniably a business where it is difficult or impossible to make profits without massive subsidies. That is not to say the share price can’t rise given that the current price is not reflecting much optimism.

Bombardier is also redeeming some debt early Including some 7.5% bonds due 2018 and some 5.5% bonds due 2018. These are being redeemed at full face value plus accrued interest plus a small redemption premium. ┬áThe money to redeem these bonds came from new bonds issued at an even higher rate 8.75%, due December 2021. NO, I am not making this up, they borrowed at 8.75% to pay off bonds at 7.5% and 5.5%. The reason for doing this was likely a fear that they might be unable to borrow at the time the 5.5% and 7.5% bonds came due. It can be seen here that Bombardier’s lenders have been making good money. The lenders (bond investors) took a risk but they got paid in full including interest. On that note, I suspect the investors in the Bombardier pref shares that I follow will also ultimately do well. Some investors have a capital loss on these shares, others a gain. As a population, investors have a capital loss as the shares are at $16.28 versus an issue price of $25. But they have never failed to pay the 39 cent quarterly dividend. There is always some risk that Bombardier will eventually go bankrupt but it seems more likely that they will continue to struggle along and that the pref dividends will continue to be paid. It is possible that the pref shares could recover towards $25 if Bombardier’s fortunes improve. As far as the Bombardier 8.75% 2021 bonds, I don’t know how retail investors can buy. I do see that TD Direct does not have them. RBC Direct also does not have them. If your particular broker does have them, they may trade at a premium which would reduce yield and buying them will always involve a hidden fee in terms of the buy/sell spread. When a company seems destined to survive but make very little or no money, it may be better to be a lender or a pref share investor than an owner.

Alimentation Couche-Tard (Circle K) is updated and rated Buy at $62.77. This is a fantastic company. It’s not really a compelling bargain but should continue to do well over the years. I may add a little to my position. It it then goes up, fine. If it happens to pull back 5 or 10% or more which it could do if gasoline margins are low then also fine as I will add to the position.

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