Bombardier’s turnaround strategy in doubt with time running out on five-year growth plan


Bombardier Inc. plans to consolidate its aviation business to focus on corporate jets as protracted challenges in its rail division cloud its 2020 financial outlook, leaving analysts questioning why they should have confidence in the latest restructuring given there’s only one year left in the manufacturer’s five-year turnaround plan.

The Montreal-based train and plane manufacturer said Thursday it will sell its aerospace facilities in Belfast, Ireland and Casablanca, Morocco as part of an ongoing plan to divest out of the commercial airline space. It has already offloaded the C-series to Airbus, the Q400 turboprop line and the Downsview assembly site in Toronto.

“We want to zoom in on the businesses that are going to create the most value for our shareholders,” chief executive Alain Bellemare said on a conference call with analysts, citing its successful business jets and passenger rail divisions.

The announcement came a week after Bombardier’s stock price plummeted 18 per cent when it surprised investors by slashing its 2019 earnings and revenue forecast due to unexpected challenges in its rail division, where a handful of complex projects have “proven to be a little more difficult than we thought,” Bellemare said.

Bombardier posted first-quarter results in line with the revised expectations, but suspended its loose targets for 2020 given the setback in the rail operations, with analysts questioning the move to sell assets.

“You have the potential to hit (the 2020) targets, but not necessarily on time, yet you’re selling some of businesses that contribute to it,” Credit Suisse analyst Robert Spingarn said on the call. “Why should we have greater confidence in these numbers, and how do you regain the confidence of the Street.”

Bellemare countered that it’s not that the business is broken, “it’s just we have a number of large, complex projects coming through our pipeline all at the same time.”

“That’s the reason why we’re a little prudent this morning. It’s not because we lack confidence in Bombardier Transportation.”

Its stock price dropped another 5 per cent to $2.22 by market close, amid investor frustration.

“We think it is going to take longer than we had previously thought to get the company to the targeted levels of cash flow and profitability,” Rob Stallard, an analyst at Vertical Research Partners, said in a note to clients as he cut the stock to hold from buy. “The decision to sell half of the aerostructures division, with no buyer lined up, also removes a considerable chunk of the projected future profits and cash flow.”

The sale of the Northern Ireland facility shocked the 3,600 employees that make airplane wings, including for the Airbus A220 previously known as the C-Series. The Casablanca facility employs 400 people.

Given the Brexit drama has already led to uncertainty around business investment in Britain, Unite, the largest union in Britain and Ireland, sought assurances from both Bombardier and the U.K. government around job retention.

“The U.K. government must stand ready to ensure the retention of jobs and skills at these sites, Bombardier is simply too important to the Northern Ireland economy to allow anything less,” Unite’s Jackie Pollock, the regional secretary in Ireland, said in a news release.

In an emailed statement, Bombardier acknowledged employee concern but said there are no workforce announcements as a result of the decision to sell. It said it will work with the unions through the ownership transition.

Airbus declined to comment on how the sale of a key supplier will affect it or whether it’s interested in buying the Belfast facility. But the French aerospace company does not expect a sale to have any impact on A220 production, spokeswoman Annabelle Duchesne said in an email.

National Bank analyst Cameron Doerksen estimated Bombardier could earn between $910 million and $1.04 billion from the asset sale, according to a Thursday note to clients.

National Bank sees the logic in consolidating the aviation business given the “vast majority” of the value stems from the business jet program.

Despite management’s cautious tone, Doerksen remains confident Bombardier will achieve its margin targets by 2020 or 2021.

“We continue to believe that Bombardier’s challenges in its transportation division will ultimately be resolved,” he wrote.

Citi analyst Stephen Trent noted to clients Bombardier wasn’t alone in the mixed results given it was a seasonally weak first quarter across the global aerospace industry. Its full-year outlook, which includes the scheduled completion of three of the five challenged rail projects and the delivery of more Global 7500 aircraft, featured “solid growth” and “no obvious alarm bells,” Trent wrote.

For Bombardier, which has received $1.3 billion in combined federal and provincial loans since its near bankruptcy four years ago, the quarter is another part of its transition to growth.

“We are clearly in a much better position today than we were in 2015,” Bellemare said.

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