Bombardier: After Market Service And Defense Are Growth Levers

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Bombardier Inc. has improved their financial health and profitability, with Q3 revenues up to $2.2 billion and adjusted EBITDA rising 22%.BDRBF delivered 39 business jets in the quarter, and entered ...

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JHVEPhoto/iStock Editorial via Getty Images Company Overview & Recent Results Bombardier Inc. (TSX: BBD.B) (OTCQX:BDRBF) is a leader in the aerospace industry, headquartered in Montreal, Quebec. The company is primarily known for manufacturing business jets, with its flagship Global, Challenger, and Learjet series establishing it as a major player in the market. BBD.B has successfully refocused its business model in recent years, divesting from rail transportation and concentrating on small aircraft manufacturing. This strategic shift has seen the company streamline operations, improve financial health, and enhance profitability. In the most recent quarter, ended June 30, 2024, BBD.B reported strong results, with revenues reaching $2.2 billion, a year-over-year increase of 32%. The company’s adjusted EBITDA rose significantly to $335 million, marking a 22% improvement compared to the same period last year. BBD.B delivered 39 business jets in the quarter, underscoring the continued robust demand for its high-end aircraft. Net income also reversed a loss from the previous year’s quarter, showcasing management’s successful turnaround efforts. The company also maintained a positive outlook, and reiterated its guidance for the full year. BBD.B expects to generate revenues of approximately $7.5 billion in 2024, supported by sustained demand for large business jets. The strong financial performance was also reflected in the company's order backlog, which stood at $14.9 billion, and with a book-to-bill ratio of 1. The company continued to focus on operational efficiency, reducing its debt to $4.5 billion, down from $5.3 billion a year ago. The trend towards $3.6 billion of net debt remains intact. BBD.B has made significant progress in strengthening its balance sheet and optimizing its operations, yet certain risks linger. The current macroeconomic landscape presents challenges, including softening demand in the business aviation segment and fluctuating fuel prices, both of which could adversely affect customer demand. However, BBD.B's strategic efforts to broaden its global reach, alongside a sustained focus on aftermarket services and defense, position the company favorably for continued growth. I rate BBD.B as a Buy, with a price target of $112.50, derived from a 9x EV/EBITDA multiple for 2025, in line with industry peers. Strategic Shift BBD.B is strategically positioning itself for long-term growth by focusing on three key areas: aftermarkets, defense, and margin improvements. Despite concerns about an economic slowdown, the company maintains a healthy demand profile and expects strong sales momentum as it continues to build relationships with governments and prime contractors across more regions. A notable recent success was the deployment of the Challenger 650 aircraft in Finland for water surveillance, showcasing its reliability and versatility. The company also secured a Medevac contract in Germany, further highlighting the aircraft's adaptability. This shift is part of a broader strategy to boost EBITDA margins, with a target of 18% by 2025. A significant part of BBD.B's growth plan lies in its Aftermarket services. By leveraging its expanded service network and growing fleet size, BBD.B aims to reach 50% market share by 2030, with service revenue projected to grow to as much as $3.9 billion. BBD.B is also actively managing supply chain disruptions, particularly in engine production, while collaborating closely with suppliers to ensure stability. Its backlog and book-to-bill ratio of 1 remain healthy, supported by a geographically diverse sales strategy that capitalizes on emerging market opportunities. The company is also exploring mergers and acquisitions and expanding capabilities, such as landing gear and engine work, to drive further growth in this sector. Defense also presents a major growth opportunity for BBD.B, as advancements in military technology make business jets more viable for defense applications. The defense segment is projected to generate between $1 billion to $1.5 billion in revenue by 2030, a significant potential increase driven by investments in innovation and performance, especially in medium and large business jets. BBD.B has the advantage of an established customer base, including governments, and a robust reputation for producing high-performance jets. As an industry to enter, defense is attractive due to long-term contracts, government spending, and the increasing need for modernized, high-tech aircraft for surveillance, transport, and defense missions. However, competition is steep, with well-established aerospace and defense companies already holding significant market share. The company's defense strategy, with a focus on its Global and Challenger aircraft, is well-suited to carve out a space in the market, but growth may take time and require overcoming challenges in terms of innovation and scale. Bombardier Investor Day Presentation  In terms of financial performance, BBD.B is targeting free cash flow of $900 million by 2025. This improved cash flow will allow the company to deleverage, targeting a net debt reduction to $3.6 billion and a leverage ratio between 2.0x and 2.5x. The bottom line is that BBD.B's strategy positions it to capitalize on its growing service and defense revenue streams while maintaining operational efficiency and improving financial flexibility. The company's strategy has paid dividends already and they remain in a good spot to achieve these realistic targets. Risks BBD.B faces several key risks despite its promising position in both civil aviation and its expansion into the defense sector. These risks could impact its ability to achieve growth and profitability targets, particularly in defense. Key risks include supply chain constraints, labor risks and market entry risks. From a supply chain perspective, BBD.B continues to face headwinds related to supply chain issues, particularly concerning aircraft engines. These challenges could delay deliveries, increase costs, and strain relationships with customers who rely on predictable aircraft availability. While BBD.B has worked closely with engine manufacturers to mitigate risks, the global aerospace supply chain remains vulnerable, particularly post-pandemic, with backlogs and logistical constraints continuing to pose significant threats. James McGrail, RBC's Equity Research Analyst, highlighted these risks on the recent earnings call, noting that BBD.B's margin estimates may be a little high as other competitors have noted cost pressures within the supply chain. However, Bart Demosky, CFO of BBD.B noted that trends are headed in the right direction and that they would whether the storm, which seems likely given recent strong performance. Recent labor negotiations underscored a growing trend of workforce disruptions. Labor disputes and strikes can lead to production delays, which could pressure BBD.B's future ability to meet its delivery schedules. In Q2 2024, BBD.B lost 11 working days due to labor strikes, creating scheduling pressures that needed to be managed throughout the rest of the year, though fortunately, did not have a material impact to their delivery numbers. Finally, while BBD.B has set ambitious targets for its defense business, entering this market comes with substantial risks. The defense sector has established competitors, such as Boeing and Lockheed Martin, with decades of experience and longstanding government contracts. The company will need to navigate strict regulatory hurdles, lengthy procurement processes, and significant upfront investments, both qualitative and quantitative, to secure consistent contracts. However, given their long term view and a sector that remains in steady growth, BBD.B can mitigate this concern with continued operational excellence, but growth may be bumpy. Undervalued vs. Peers BBD.B has recently closed the gap towards receiving market-level multiples as the company has reduced its debt and delivered solid operational performance. Given the difficulty in projecting contract-based revenues, the focus on EV/EBITDA multiples was used. BBD.B's operational improvement has become somewhat reflected in the company’s EV/EBITDA multiple, which has grown from ~6x to ~8x based on 2025 estimates. The aerospace and defense industry typically trades at around 10x EV/EBITDA, and I believe BBD.B's true competitors are better represented by Embraer (ERJ), Dassault (OTCPK:DASTY), and Textron's (TXT) Aviation division. Below is a comparison of their EV/EBITDA multiples based on data from their annual reports and investor presentations. On an apples to apples comparison, ERJ is the best comparable and I believe that it's not unlikely that BBD.B to hit 9x their 2025 targets. That would give them an enterprise value of $14.625 billion, with net debt of $3.6 billion, and an equity value of $11.025 billion. With 98 million shares outstanding, the share price target is $112.50.   Author EV/EBITDA Comparables The Bottom Line BBD.B has made significant strides in refocusing its business, transitioning from rail transportation to concentrating on business jets, with a notable improvement in financial performance and operational efficiency. The company's strategic emphasis on aftermarket services, defense applications, and margin improvements positions it for long-term growth, supported by a healthy order backlog and rising demand for high-end aircraft. While there are risks, including supply chain disruptions and labor challenges, Bombardier’s ability to navigate these pressures has been promising. With its improving financial health, particularly its focus on deleveraging and free cash flow generation, the company is well-positioned to capitalize on growth opportunities in both the civil and defense aviation markets. Despite some risks, Bombardier's strategy and execution make it an attractive investment, especially when compared to peers in the aerospace and defense sectors.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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