Are Bombardier shares a buy at current valuations?
Bombardier has emerged from its turnaround and is benefiting from the new growth prospects of its flagship Global 8000 aircraft. The company is also looking at the defense industry to monetize its Global and Challenger platforms. Bombardier CEO Eric Martel stated that the reliability, range and ability of Bombardier aircraft to operate at high altitudes make them suitable for demanding missions with minor modifications.
When it comes to adapting business jets for defense, she is not proposing to make fighter jets. Bombardier makes jets for air surveillance and border and maritime patrols. Because the base platform is Global and Challenger and changes are implemented through partnerships, the risk is low.
How much growth can the above initiatives generate?
Bombardier sees growing demand for its aircraft, with US order backlog reaching $16.6 billion third quarter compared to $14.4 billion in the same quarter a year ago. Even today, most of the estimated $9.3 billion in 2025 revenue comes from business jets. It expects the defense segment to contribute between $1 billion and $1.5 billion in revenue by 2030.
Considering that Bombardier expects aircraft deliveries to reach a level of 150 from 2025, a price-to-sales ratio of 1.7 times is high. So there is no strong investment case for buying this stock at such high valuations. That explains the recent 10% correction.
Should you hold or sell Bombardier stock?
However, the prospects of joint ventures and partnerships could trigger the next growth cycle. For example, recent talks with Saab to bring Gripen fighter jet production to Canada rely on a lot of moving parts. Saab produces fighter jets in its home country of Sweden. Setting up a factory in Canada requires a proper order from the Canadian government.
The Canadian government has allocated a budget of $80 billion to the Canadian Armed Forces for a period of five years. Ongoing trade problems with the United States encouraged Canadian Prime Minister Mark Carney to order a review of F-35 jet purchases from the US. If the Canadian government decides to expand the made-in-Canada campaign to defense purchases, Bombardier could be a beneficiary in the fighter jet space.
If the government uses taxpayers’ money to help Bombardier win the contract, the company will be closely watched because of its tainted history of governance issues and the misuse of bailout money by previous management, which gave hefty bonuses to bosses while the company was near bankruptcy.
The company continues to reduce debt and boost free cash flow. The fourth quarter is the year in which maximum aircraft deliveries take place and turnover is achieved. However, the 116% rally has already taken into account seasonal growth, the launch of the Global 8000 series and new defense orders.
I’ve been bullish on Bombardier all along, but the stock appears to be priced to perfection with limited upside potential. If you own Bombardier stock, now may be a good time to sell and capture the early growth gains.
Instead, buy this stock on the dip
Bombardier’s journey as a growth stock may gradually fade away, and a new journey as a dividend stock may begin in the medium term. If you’re looking for growth, now is a good time to look for new opportunities arising from the shift in the global supply chain.
Descartes Systems (TSX:DSG) is just starting to recover from the trade war dip. Some of the supply chain solutions, such as global trade intelligence and transportation management, were in demand throughout the year, generating cash flows. The company used this time to make cash acquisitions and increase sales. In the coming year, Descartes could facilitate new supply routes with its suite of different supply chain solutions, such as customs and compliance, inventory management, tracking and more.
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