For the first time in years, Bombardier’s stock is worth talking about

Bombardier Inc. is generating cash, paying down debt and raising its financial targets. Investors are paying attention, too: The share price has rallied more than 250 per cent over the past eight months.

Has the stock become relevant again?

After years of disappointments and setbacks – a tangled mess of steep losses, bloated debt, jettisoned divisions and a demoralizing multiyear decline in the share price that culminated in a reverse share split last year – the Montreal-based aerospace company was easy to ignore.

But the stock is gaining new respect after Bombardier posted upbeat results last year and executives played host to an investor day this week armed with renewed confidence.

“The key takeaway for us was that the tone of this investor day had shifted away from focusing on ‘fixing’ the business to ‘growing’ the business,” said Kevin Chiang, an analyst at CIBC World Markets, in a note.

Bombardier expects its annual revenue to reach US$9-billion by 2025, up from an earlier projection of US$7.5-billion, owing partly to a robust backlog of orders for its business jets.

It is also forecasting free cash flow of US$900-million, up from US$500-million previously, as margins remain healthy.

And it expects to reduce its debt load considerably. As a result, Bombardier is hoping to drive down its net leverage ratio – which compares debt with profits, after accounting for cash – below 2.5 in 2025, marking a big improvement from a leverage ratio of 4.6 at the end of 2022.

That implies a healthier balance sheet, greater financial flexibility and a better credit rating.

The 2025 goal: Attain muchcoveted investment-grade status from credit-rating agencies, requiring an upgrade of six notches from its current rating with Moody’s.

These are far from pie-in-thesky promises, but rather based on Bombardier’s recent progress.

It repaid US$1.1-billion in debt in 2022. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) rose 45 per cent last year, to $930-million. And its order backlog increased 21 per cent, to US$14.8-billion.

Analysts are more enthusiastic.

On Friday, Walter Spracklin, an analyst at RBC Dominion Securities, raised his target price on the stock to $100 from $89. That implies a 54-per-cent gain from the current share price within 12 months.

Even $200 isn’t out of the question, Mr. Spracklin said in a note. The stock, he believes, is “a fundamentally mispriced security” that trades at a 45-per-cent discount to peers.

The risks associated with investing in Bombardier are now substantially lower than they were two years ago, he argued, given the company’s debt reduction, strong track record and promising new revenue streams from defence – essentially, planes made for maritime patrol, surveillance and transporting heads of state.

If the thought of Bombardier’s stock trading at $200 seems outrageous, consider that the company consolidated its shares at a ratio of one new share for every 25 old ones. The move transformed a $1.13 stock into a $28.25 stock in mid-June by reducing the share count, without affecting a shareholder’s stake in the company.

Still, the shares ended this week at $64.81 in Toronto, equivalent to about $2.59 before the consolidation, underscoring Bombardier’s success during a rough patch for the broader stock market.

But the investing case here is no slam dunk.

Bombardier is facing intense competition from the likes of Embraer SA, which also has been enjoying a resurgence from strong demand for executive jets.

The Brazilian company’s fourth-quarter revenue rose 53 per cent year-over-year, and the share price is up 92 per cent since July, suggesting that at least part of Bombardier’s recent success is due to pandemic-driven demand for private planes that has also benefited other players.

Now, airports are functioning again while businesses face soaring borrowing costs after central banks raised their key interest rates aggressively in a battle against inflation. A looming recession won’t bolster the case for owning corporate jets.

Say what you will about billionaires’ immunity to inflation and economic downturns, but Moody’s cautioned in a ratings note in January that the businessjet market is cyclical, with strong competitors.

That means the fresh 2025 financial targets that Bombardier released this week will require a lot of things going right for the company over the next two years.

In the meantime, Bombardier is riding at least one profound shift: For the first time in years, the stock is worth talking about.

Bombardier is facing intense competition from the likes of Embraer SA, which also has been enjoying a resurgence from strong demand for executive jets.