Rising Regulations Will Limit Jet Sales Despite Aftermarket Gains

Key Takeaways

• Heavy reliance on business jet sales exposes Bombardier to industry shocks, regulatory risks, and market downturns with limited diversification to offset earnings volatility.
  
• Ongoing operational challenges, rising costs, and legacy reputational issues threaten profitability, customer trust, and long-term revenue growth.
  
• Robust aftermarket growth, defense expansion, product innovation, and improved financial health position Bombardier for stronger margins, stable cash flow, and diversified long-term earnings.

Catalysts

Engages in the design, manufacture, and sale of business aircraft and aircraft structural components worldwide.

• Heightened environmental regulation and global carbon reduction initiatives are expected to increasingly restrict private jet usage and sales worldwide, directly threatening Bombardier's future revenue growth as demand weakens for business aviation in developed and emerging markets.
  
• Persistent global monetary tightening and rising interest rates forecast over the coming decade will likely reduce the affordability of new business jets, shrinking Bombardier's addressable market and putting prolonged pressure on aircraft sales volume and net margins.
  
• The company faces significant concentration risk due to its narrow focus on business jets following divestiture of its rail and commercial segments, exposing Bombardier to sharp declines in earnings if any long-term negative shock hits the business aircraft market.
  
• Ongoing supply chain disruptions and geopolitical instability continue to introduce operational inefficiencies and cost inflation, which could further compress margins and erode profitability over the medium to long term, especially as global trade tensions remain unresolved.
  
• Legacy issues, including Bombardier's historically high debt burden and past reputation for quality and delivery problems, may continue to undermine customer trust and hinder new order growth, potentially resulting in weaker revenue and constrained future earnings.

Bombardier Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Bombardier compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Bombardier's revenue will grow by 3.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 5.1% today to 7.0% in 3 years time.
• The bearish analysts expect earnings to reach $676.5 million (and earnings per share of $7.87) by about August 2028, up from $449.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.2x on those 2028 earnings, down from 26.4x today. This future PE is lower than the current PE for the CA Aerospace & Defense industry at 31.1x.
• Analysts expect the number of shares outstanding to grow by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.64%, as per the Simply Wall St company report.

Bombardier Future Earnings Per Share Growth

Risks

• The continued strength in Bombardier's aftermarket services business, which grew revenues by 16% year-over-year and now comprises 29% of total revenue, establishes a steady recurring revenue base that is likely to support higher long-term net margins and cash flow stability.
  
• The record-breaking $16.1 billion backlog and a robust 2.3 book-to-bill ratio, driven by large fleet orders and strong ongoing demand, point to sustained high revenue visibility and delivery growth, which could bolster future earnings.
  
• Expansion in the defense segment, with new contracts for Global 6500 jets and strategic partnerships (such as with Leonardo for maritime patrol and interest in unmanned systems), positions Bombardier to capture secular growth in global defense spending, positively impacting revenue diversification and long-term margin potential.
  
• Successful refinancing activities and a focus on debt reduction, highlighted by credit rating upgrades from S&P and Moody's, reflect improving balance sheet strength, which lowers financial risk and will likely enhance net income through reduced interest costs.
  
• Launch of new, higher-margin products like the Global 8000, which is set to deliver at a $3 million per unit price premium, should drive incremental margin accretion and top-line growth as the business jet replacement cycle favors next-generation, long-range models.

Valuation

• The assumed bearish price target for Bombardier is CA$128.58, which represents two standard deviations below the consensus price target of CA$170.6. This valuation is based on what can be assumed as the expectations of Bombardier's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$200.8, and the most bearish reporting a price target of just CA$120.08.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $9.6 billion, earnings will come to $676.5 million, and it would be trading on a PE ratio of 17.2x, assuming you use a discount rate of 7.6%.
• Given the current share price of CA$164.41, the bearish analyst price target of CA$128.58 is 27.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.