Bombardier Investors Losing Faith After Jet Delays

by Frederic Tomesco

(Bloomberg) -- Pierre Beaudoin often cites “flawless execution” as a pillar of Bombardier Inc.’s strategy. Investors say the chief executive officer isn’t delivering.
In 6 1/2 years on the job, Beaudoin has presided over delays in two jet programs; the exit of two senior aerospace sales executives in just over a year; missed profit targets and the worst stock performance among Canadian industrial companies.
“I’ve given up hope,” said Luc Fournier, fund manager at Industrial Alliance Insurance & Financial Services Inc. in Quebec City, who oversees about C$600 million ($474 million) and says he sold the last of his Bombardier shares last month. “I got tired of waiting. Even at this level, I’m not getting back in. There’s a credibility issue.”

Two years of delays and cost overruns on the $4.4 billion CSeries jet have tainted Bombardier’s reputation for execution, and the company took another hit last month after s
aying it would miss profit goals and halt development of the Learjet 85 business jet. That sparked concern among analysts the Montreal-based planemaker would need to borrow more to provide liquidity.
Bombardier has ample resources for aircraft development, Beaudoin said Jan. 21 in an interview in Davos, Switzerland. He said he was “not surprised there are people questioning the ups and downs” of the CSeries after four postponements for the commercial debut of the company’s biggest-ever model.
“The airplane is performing very well,” Beaudoin said. “So we’ve just got to continue on with this project that we started and do the work.”

Dividend Question

The company isn’t commenting on its performance ahead of the Feb. 12 earnings release, Isabelle Rondeau, a spokeswoman, said in a telephone interview. Bombardier has nothing to add to what Beaudoin said in Davos, she said.
Management should scrap the 2.5-cent quarterly dividend “if they want to look serious and make Bombardier appear as an investor-focused company,” said Troy Crandall, a Montreal-based analyst at MacDougall, MacDougall & MacTier Inc. in a telephone interview. “If you’re in a cash crunch, why are you paying a dividend?”
Bombardier paid out $45 million in dividends in the third quarter, bringing payments for the first nine months of 2014 to $137 million. Bombardier has been free cash flow negative for three consecutive years through 2013, not unusual for a company with big development costs. Through the first nine months of 2014, free cash flow usage was $1.71 billion, Bombardier said Oct. 31.
“It doesn’t make sense to pay a dividend,” said Massimo Bonansinga, a fund manager at CI Investments Inc. in Toronto. “It would send a positive message to the market if they cut the dividend” and did a debt issue.

Snowmobile Roots

Bombardier’s Class B stock has lost 67 percent of its value since Beaudoin took over in June 2008, placing it last among the 24 members of the sub-index of Canadian industrial shares. The gauge itself gained 76 percent in the period.
Beaudoin, 52, whose father Laurent serves as chairman after running Bombardier for most of four decades, is the grandson of the company founder. Joseph-Armand Bombardier created his namesake corporation in 1942, five years after marketing the first seven-passenger snowmobile.
The company branched into trains -- the rail unit produced 48 percent of 2013’s $18.2 billion in revenue -- before acquiring Canadair in 1986. Bombardier, which invented the regional jet in the late 1980s with the CRJ family, is now the world’s third-biggest maker of civil aircraft, according to the company’s website.

Dual Structure

Beaudoin has been at Bombardier since 1985, when he joined the Marine Products Division. He began his career as Canadian customer service manager for Bic SA’s water sports unit.
Members of the Bombardier and Beaudoin dynasty control the manufacturer through majority ownership of the Class A shares, which carry 10 voting rights each.
“This is a family-run company, so you can’t exactly have an investor coup and overthrow management here,” said MacDougall’s Crandall. “Still, the pressure is definitely on them now. They’ve run out of excuses.”
The stock peaked at C$26 in September 2000, for a market value of C$35.8 billion. On Jan. 31, the shares closed at less than C$3, for a value of C$5.14 billion.
Canada’s second-biggest pension fund manager and Bombardier’s No. 2 stakeholder, Caisse de Depot et Placement du Quebec, trimmed its stake by 18 percent in 2013, the last full year for which data is available.

Debt Ratings

“Bombardier is a very important company,” Caisse CEO Michael Sabia said in an interview Jan. 22 in Davos. “Every business gets to a point where it has issues and has to resolve them. Bombardier is going through some issues, but we’re very confident they are going to get through.”
While Beaudoin said last month in Davos that Bombardier has enough liquidity to fund work on the CSeries and the Global 7000 and 8000 business jets, not everyone is convinced. Some analysts at firms such as RBC Capital Markets and JPMorgan Chase & Co. said they expect Bombardier to borrow more money this year, adding to the $7.6 billion of long-term debt it had as of Sept. 30.
Standard & Poor’s last month cut its rating on Bombardier’s debt to B+ from BB-, saying the company’s performance in 2015 “could remain challenged due to market conditions and the company’s continued large capital spend program.” Under Beaudoin’s stewardship, S&P has sent Bombardier’s debt rating 3 grades lower into junk.
Moody’s Investors Service also last month placed Bombardier’s Ba3 rating under review for a possible downgrade, saying the company will probably need to sell additional debt to “address its weakened liquidity position.”
Both Moody’s and S&P rate Bombardier’s debt junk.

Executive Departures

In July, Beaudoin broke up the aerospace business into three main units -- with Guy Hachey, who was president of Bombardier Aerospace, retiring as part of the reorganization. Last month Ray Jones, who was leading the charge to market the CSeries, left the company.
“This thing has been burning cash and managers,” said Bonansinga, of CI Investments. “It doesn’t give you the impression that the program is really on track. Until the CSeries enters service, I don’t think the market is willing to give them the benefit of the doubt.”
Much is riding on the success of the CSeries.
Bombardier’s biggest line of jets was conceived to compete with smaller planes from Boeing Co. and Airbus Group NV. After initially being scheduled to enter service in 2013, the plane is now slated for delivery by the end of this year.

Profit Outlook

“They just consistently miss,” Wendell Perkins, a Chicago-based fund manager at Manulife Asset Management Ltd. specializing in international equities including Canada, in an interview in Toronto. Perkins and his team oversee about $1 billion, including Bombardier shares.
January’s profit warning also marked the second time since 2013 that Bombardier lowered its margin goals for trains and aerospace. In March of last year, Beaudoin told investors the company was committed to doubling pretax earnings over five years.
Excluding some costs and gains, per-share profit at Bombardier fell to 33 cents in 2013 from 38 cents a year earlier, and is forecast to have dropped again in 2014 to 29 cents. Analysts polled by Bloomberg are forecasting 37 cents this year.
Of 25 analysts covering the stock, 13 have a hold rating; seven say buy and 5 say sell. The 12-month price target is C$3.65.
“It’s a tough business so clarity is really difficult,” Perkins said. “You have to just close your eyes.”