I got an interesting visit on my website today:
You know, reader, you could have e-mailed me directly. Nevertheless, I shall answer your question in the most direct manner.
BBD.B has excellent products. Its train, Learjet and others are some of the best in the world. So why is it so failing so hard for so long? Well, Bombardier’s biggest problem is simple: it’s a company led by incompetent, for incompetents. Had it not been for the multiple interventions of the government, it would be long gone already.
It managed to survive through the years merely thanks to its train division, but nothing could prepare them to face the CSeries disaster. 10 years from now, analysts will comment on how incredibly stupid Bombardier’s management was to not only start a project that was doomed from the start, but actually dump billion after billion for well over 7 years now. Many people like to admire Bombardier run-up since the end of the financial crisis (from $3 to $8.15, then from $2.40 to $7.5), but they quite forget that BBD.B used to trade at $20 per share. Even at it top value in the last 10 years, BBD.B was barely valued at $15B canadian dollars. Airbus and Boeing, its competitors, are valued at 44B euros and $77 USD respecfully. Keep in mind both companies are almost entirely plane-oriented as well.
So how exactly was a company valued at a fraction of those two giants supposed to compete not only on the 110-130 passenger planes, but also on the private jet, trains, rails and pretty much every step in-between? That’s a good question. Hell, 10 years ago, BBD.B also included recreative ATV and snowmobiles. What’s next, helicopters while you’re at it?
In any event, the C-Series would have been a resounding success - had it been launched in 2011. We are in 2016 and I am still not sure they will delivery the first planes this year (if ever). With 5 years of costs and fees adding up, Bombardier quite simply ran out of money. There is no other way to put it: when you have 30,000+ employees, most of them earning over $100,000 a year (engineer, senior engineer, etc), you are looking at a MINIMUM $3B in wages per year. This is nothing if you actually have something to sell that you earn money from, but the CSeries, well, doesn’t earn them money yet. To make things worse, it is incredibly costly to get a plane certified for passenger transport. And to make things quite desperate, the C-Series is composed almost entirely of entirely new elements, which all have to be tested in hundreds of different scenarios.
In other words, Bombardier did not have the resources to undertake such a project. It just wasn’t feasible. Already, it had had to sell 50% of its C-Series project for a meager $1B and that money is already long gone. It is planning a spinoff IPO of its train division and you can bet the money will be gone within a month or two. It already has maxed its debt capabilities and the C-Series, well, is still not flying.
Oh, and it’s not selling neither. And those who sell, well, are apparently sold at a loss and will keep selling at loss for the next two years.
Do I need to keep going?
Oh yeah - one of the C-Series major selling point was its fuel economy. Except that nobody one cares about that anymore because oil costs basically nothing. Nobody is going to try an unproven, new to the market plane just to save a couple of bucks on fuel, especially given the 7+ years of delay. Oh, and BBD.B’s competitors in that segment are pricing their planes extremely aggressively precisely to prevent BBD.B from breaking up their little duopoly, meaning that it’s extremely hard for the tiny Bombardier to have any kind of decent pre-sales for its plane.
All in all, Bombardier is quite possibly led by the dumbest people on this planet. These people are so dumb they make Melissa Mayer look like a business strategy genius. In case you still haven’t picked it up yet, BBD.B is worthless. Unless there is some miracle and it gets bought out, it’s simply gone. The company will keep existing, but the shareholders will lose it all. It is simply crazy to believe that BBD.B will ever recover from today’s stock levels: not even Steve Jobs could pull it off.
Of course, on paper, the train division alone is worth over $2.40 per share. If BBD.B stopped the C-Series today and sold its train division at fair value, every shareholder could easily get over $2 per share. However, this unfortunately will not happen: there is no way BBD.B will stop the C-Series program. It will keep pursuing a losing strategy for the years to come like their lives depended on it, dumping billion after billion into a project that will never work. I’m not saying the C-Series is not a good plane, I’m simply saying that it has a negative economic value for Bombardier, i.e. they should basically pay to get rid of it. Had Bombardier never restarted that project, the stock would be at $4-5 today.
BBD.B is a terribly-managed company and it has been terribly-managed for over 15 years. I’m not sure what people expected exactly: that they would all of a sudden become good managers? BBD.B today has a market cap of $2.64B; this is less than Hudson Bay Co, a shitty retailer with 80 stores. That’s right: a company that is supposed to fly thousands of planes everywhere in the world is valued at less than a provincial store with 80 establishments. How serious that can be? Would you order a plane from a company valued at $2.64 that may or may not be bankrupt within 5 years? Yeah, thought so.
So, if you are long, what do you do? You hold and you cross your fingers, hoping for a buyout. The C-Series will never earn BBD.B a penny in profit - ever. Here are the possible scenarios I envision for the future of BBD.B
- Simili-bankruptcy; company is liquidated, government steps in to nationalize it/whatever, shareholders get shafter (as always). Value per share: $0.00-$0.10. Odds for this scenario: 50% (if not higher. Probably close to 70% and kicking up every day).
- Some low-ball take-out “save me” offer from the government, saving jobs before it is too late and saving face for shareholders. Value per share: $0.35-$0.45. Odds for this scenario: 30%.
- Split into two companies, one of them being the train/rails segment, shareholders get part in both. Value per share: $0.80-$1.20. To be clear, the train section is worth $1.60$2.40 and the C-Series section is worth $0. 50% of each company gives us a $0.80-$1.20 value. $Odds for this scenario: 10%.
- Complete takeover by a competitor. Value per share: $1.60-$2.40. Odds for this scenario: 10%
It thus follows that the fair value of BBD.B, taking middle values, is $0.445 per share. If you are long, cross your fingers for a buyout, then never invest in companies based in Québec ever again. Until then, don’t look at the stock price because BBD.B is going to zero faster than my odds of ever having a girlfriend. At this point, you can’t really sell because it can hardly get worse: the company is basically considered bankrupt already and if you didn’t sell a month ago, it makes no sense to sell now.
When people google “terrible business decisions,” I hope they find BBD.B.