Description

Bombardier (“the Company”) is a business jet OEM that sells under the recognizable Global and Challenger brands.  At $0.89 (USD), it’s a ~$2.1bn market cap company with ~$4.7bn of net debt and a ~$6.8bn enterprise value.  It’s listed in Canada and trades fairly thinly at ~$5mm/day.  The reason it’s interesting is the Company had historically been poorly managed, severely under-earning, and had real leverage concerns (~$10bn of gross debt at the start of the year), but all of this is changing.  Specifically, the new management team was able to focus on a simplified business jet business (the former CEO divested the transportation business as his last act), they used proceeds to deleverage and refinance debt, they implemented an extensive cost reduction program, and they have positioned the Company to ‘mechanically’ go from ~$500mm of EBITDA this year to ~$1.5bn+ by 2025.  Even if the Company only hits $1.2-1.3bn (though I think their plan to achieve $1.5bn is very reasonable), the stock still pencils to more than a double from here at ~8x EBITDA (a reasonable through-the-cycle normalized multiple) leaving healthy upside as management executes on their plan. 

By way of quick background, the new management team came on board in early 2020 and has taken ambitious steps to turn around the operations.  Eric Martel took the CEO role in April 2020 in a move to return to Bombardier after leaving in 2015 when he was the President of the Business Aviation division.  This hire is extremely fitting as the Company had been in the process of divesting non-core assets and is now solely manufacturing business jets (the business he formerly led).  Upon joining the Company amidst the global pandemic, Martel began to put a plan together to return the Company to profitable growth and industry leading margins as he waited for the transportation business sale to close (which occurred in early 2021).  With ~$3.6bn of proceeds generated from the sale, management has moved to quickly pay down near-term maturities, reducing interest expense and putting the Company on a path to profitable growth. 

In March of this year, management held an investor day and laid out an achievable plan to get to $1.5bn of EBITDA in 2025.  There are 3 primary drivers that are responsible for the ramp and each of them seem quite reasonable.  1) The Global 7500, their largest jet, had been a negative EBITDA contributor but is now inflecting and will become one of the highest margin products as deliveries ramp and the manufacturing process becomes significantly more efficient.  What’s nice is that they are already sold out deliveries through 2023, so there is minimal risk of them not achieving these productivity gains from a top line perspective.  2) The Company is removing $400mm of recurring costs from the business comprised of engineer labor reductions, indirect spend reductions, and manufacturing footprint reductions.  $325mm of the $400mm has already been fully identified and they are currently working toward the final $75mm.  3) They are looking to recapture their ‘fair share’ of aftermarket business.  They currently capture ~$1.2bn of the $3.2bn in Bombardier aftermarket work, but having invested in new facilities and expanded the full suite of services offered, they expect to get to ~$2bn of aftermarket revenue by 2025 representing ~50% of the work done on Bombardier planes.  While this is the one bucket that requires an assumption of revenue growth, management is confident in the revenues that will exist in the aftermarket over the next handful of years because these are largely ‘required maintenance’ events based upon the age of the fleet that is operating.  Overall, this plan assumes modest topline growth of ~5% and simply having Bombardier maintain its fair share of overall industry deliveries (low 30’s%). 

The main risks for Bombardier are around execution.  Given plane deliveries are sold out for the next handful of years, the bet you are making is the management team will actually be able to take out the costs and achieve the manufacturing productivity that they outlined.  What’s nice is that this almost entirely in their control.  Further, as a sanity check, the ~$1.5bn of EBITDA guidance for 2025 represents a ‘not that crazy’ 20% margin (a level that is close to what is being achieved today by competitors like Gulfstream that operate with EBITDA margins in the high teens).  The other risk people worry about is the upcoming product portfolio of the competition.  Gulfstream is coming out with a new jet (targeted for ~2023) that should bring it up to par with the Global 7500 (Bombardier’s large jet), and some worry the market may favor this new Gulfstream.  There is also some new competition coming from Dassault and Embraer in the mid-size category that would better compete with the Challenger.  The working assumption you have to make is that Bombardier currently has the leading portfolio of aircraft that have been widely recognized for performance and reliability, and they will continue to take their fair share of industry deliveries (the ~$1.5bn of EBITDA in 2025 does not require any market share gains).  Further, Bombardier is currently sold out through 2023 so much of the 2024 and 2025 deliveries will already be spoken for before the first new Gulfstream gets delivered.  There are also concerns that management will have to ramp capex again in the next few years in order to work on an upgrade for their fleet.  However, management has reiterated that capex will be in the ~$200mm range for the foreseeable future and any new projects will be done in a ‘capital light’ fashion.  Finally, this Company had historically been ‘uninvestable’ due to concerns around the excess leverage, free cash flow burn, and risk of bankruptcy.  However, the recent deleveraging with the sale of the transportation business and the upcoming inflection in FCF and EBITDA ramp has largely taken these risks off the table. 

In summary, Bombardier’s stock could trade 2-3x higher over the next ~24 months as management executes on the very achievable plan they recently laid out to get to $1.5bn of EBITDA in 2025.  The Company has a leading market position as an OEM of large and medium-sized business jets, and it should see meaningful EBITDA growth as it simply maintains its fair share of aircraft deliveries and aftermarket business.  The portfolio of planes has been refreshed, capex will remain low, debt has been refinanced and is now at a manageable level, interest expense is coming down, operating efficiencies will be achieved as Global 7500 deliveries ramps, costs are coming out of the business, and the Company is now poised to see FCF inflect into 2022.  With the stock trading for less than ~5x EBITDA and north of a 20% FCF yield (per management’s 2025 guidance), healthy upside remains from these levels. 

Investment Highlights

·         Accelerated EBITDA growth:  EBITDA is poised to inflect from ~$500mm this year to ~$1.5bn by 2025 on modest topline growth as margins return toward a more normalized ~20%.

·         FCF inflection:  The Company will be inflecting to positive FCF in 2022 as it implements cost savings, laps one-timers, reduces interest expense, and sees manufacturing productivity gains.

·         Attractive valuation:  The stock is trading for less than 5.0x PF 2025 EBITDA, significantly below the 8-10x you could expect for a business like this that is back to generating healthy margins.  The Company is expected to generate ~$500mm+ of FCF in a few years which implies the stock is currently trading at a low 20’s% FCF yield.

·         New management:  The Company has had the entire management team replaced in 2020 and this team is well suited to execute on this ‘turnaround’.

·         Healthy balance sheet:  Upon the sales of the transportation business, net debt is now ~$5bn and the Company will further de-lever toward ~3.0x as EBITDA ramps toward $1.5bn.

·         Leading product portfolio/market position:  The Global 7500 (large-size business jet) is the leading jet in its class (flies further, faster, can operate on shorter airfields, has high reliability, and an award winning cabin) and the Challenger (mid-size business jet) is the most sold aircraft in its class.  Each of their planes have been recently refreshed.

·         Deep backlog:  The Company has a backlog greater than $10bn and has production sold out through 2023.

·         Sustained capex ‘holiday’:  Having recently spent the capital to upgrade its fleet and its service facilities, the Company is expecting capex to remain at ~$200-220mm (~3% of sales) per year over the next handful of years.  And if/when they do embark on a new platform, they intend to move forward in a ‘capex lite’ construct that optimizes for cash flow and balance sheet flexibility.

·         Cyclical and secular industry tailwinds:  The industry as a whole historically delivers 500-600 planes annually, and we are now coming out of a trough from the lower end of this range allowing for healthy growth without assuming a massive ramp above the typical delivery range.  However, it’s possible that on the back of the surge in wealth creation amongst global high-net-worth individuals who recently ‘learned’ to fly private during the COVID pandemic that there could be a sustained increase in private aviation demand (this upside is not modeled).

Catalyst

• Execution of management plan toward $1.5bn of EBITDA
• Positive FCF inflection into 2022
• Increasing backlog to fully pre-sell deliveries through 2025