Bombardier Inc.’s (BBD-B.TO) stock has soared through 2021, up 212 per cent so far this year, as the company continues to restructure its debt-ridden balance sheet and sees demand for business jets grow alongside the COVID-19 recovery.
The strengthening business jet market has prompted National Bank Financial analyst Cameron Doerksen to upgrade Bombardier’s stock from “sector perform” to “outperform” as well as hike the price target from $1.00 to $1.75. The Montreal-based company’s stock ended Tuesday’s trading day at $1.47, an increase of 7.3 per cent from Monday’s close.
"Bombardier shares have frankly outperformed our expectations as we believed the market would demand more evidence of progress towards the company's profitability and cash flow targets before a significant move higher," Doerksen wrote in a note to clients on Tuesday.
"While we too would prefer to see more progress on margin improvement, we nevertheless concede that the company is making progress that is well-supported by improving end market conditions."
Doerksen said the key driver of the upgrade is strong demand in the business jet market which “will support strong new jet order activity in the coming quarters for Bombardier.” He also said the company’s continued steps to re-paying debt have helped alleviate liquidity concerns, including through the recent issuance of $1.2 billion new senior notes that mature in 2026. The proceeds are to be used to pay near-term debt.
Bombardier has spent the last several years selling off nearly all of its assets and restructuring the company to focus solely on its private jet business. In March, Bombardier CEO Eric Martel unveiled a five-year plan that aims to see debt levels paid down and sales increase to $7.5 billion by 2025.
While the private jet business is a cyclical one tied to economic performance, ATB Capital Markets analyst Chris Murray said that Bombardier is in a good position with its product portfolio to serve the growing demand in the current market. Bombardier is continuing to ramp up deliveries of its flagship Global 7500 jet, which serves the higher-end of the private jet market that Murray says has been more resilient.
“Expectations are very, very strong for economic growth as well as the fact that wealth levels among the people that would be the typical buyers of business aircraft have done well through the pandemic,” Murray said. “Bombardier is well positioned to serve the upper-end of the market.”
While 2020 saw orders for business jets grind to a halt due to the COVID-19 pandemic, Doerksen said manufacturers have cited a more positive market for new jet order activity in 2021. Last month, Bombardier announced it had received an order for 10 business aircraft from an unnamed existing customer valued at US$451.8 million. Business jet flying is also up this year, something Doerksen says is typically a leading indicator for new jet order activity.
Another sign that the market is heating up came in a recent news release from Bombardier.
Earlier this month, Bombardier announced it had launched a new program to allow customers to upgrade existing pre-owned business aircraft, something RBC Capital Markets analyst Walter Spracklin said was “on the surface, fairly innocuous” but signalled that demand for new aircraft is high and wait times are long.
“As a result, we anticipate the valuation discount being applied to the Bombardier stock (as a result of investor apathy) to compress meaningfully as investors continue to search out stocks with re-opening upside,” Spracklin wrote in a note to clients this month.
Murray said there is still room for Bombardier’s stock to grow as its financial situation continues to improve.
“You’re probably dealing with a significant double digit discount to where the stock is trading today from where we think it’s going to be in 2024,” Murray said.
“As we get additional clarity and comfort around the fundamentals of the business, I think that’s the kind of thing where you’re going to continue to see the stock move higher… There’s nothing that suggests that we’re going to see a slowdown in the market, so I think you’ll see the stock continue to respond.”
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.