Globe & Mail on Citi upgrade With a “more constructive” view of its fundamentals, Citi analyst Stephen Trent raised his rating for Bombardier Inc. (
) to “buy” from “neutral” on Thursday.
“When we reinstated coverage of Bombardier in January with a Neutral/High Risk rating, concerns about the speed at which the company could move up the Global 7500 production learning curve, potentially excessive trade-in activity on jet sales and balance sheet instability were key concerns,” he said. “However, since that time, none of these issues have come to pass — and we regret missing the opportunity to get investors more involved in the shares at lower levels. Nevertheless, applying a reduced target multiple to higher 2022E EBITDA now puts enough upside on the shares, to upgrade Bombardier.”
Mr. Trent sees the Montreal-based company poised to continue to generate higher margins on its Global 7500 ultra-long-range business jet program, and emphasized that “previous concerns about significant discounting on deliveries have not materialized.”
“At the same time, trade-in activity appears to be very limited and the growing contribution from aftermarket services is positive for sales mix (A trade-in occurs when a customer purchasing a new aircraft, convinces the manufacturer of the new aircraft to purchase that customer’s used plane, in order to effect the sale),” the analyst said. “Meanwhile, Bombardier continues to make other strides, which at least somewhat help de-risk the company’s balance sheet.”
Seeing its long-term operations as looking more stable than he previously anticipated, Mr. Trent raised his target for Bombardier shares to $1.20 from 73 cents. The average on the Street is 87 cents.
“Although Bombardier’s shares have done very well year-to-date, they are down a (mild) 10 per cent versus the year-to-date peak that the shares reached early last month,” he said. “Nevertheless, in spite of the more constructive view on Bombardier’s fundamentals, Citi maintains the High Risk qualifier on the shares, owning to the company’s high financial leverage and to its significant share price volatility. Downside risks include interest rate increases that could pressure the company’s debt servicing costs, as well as unexpected taxation on luxury products such as business jets.”