Bombardier Inc. T.BBD.A

TD: Upgrade (bis)

[Tempo1]

Sorry, I left in a hurry this morning and I forgot the quality control.

Q1/24; MARGIN JUMP AND STRONG ORDERS ADD TO STORY

THE TD COWEN INSIGHT

Bombardier reported Q1/24 Adjusted EBITDA of $205 million vs. our forecast of $216
million and consensus of $224 million. A significant step-up in margin despite delivery and
mix pressure points to much more margin expansion potential ahead. This combined with
strengthening order activity and a show of confidence from management overshadowed
the usual Q1 FCF usage, and delivery weakness
 
Impact: SLIGHTLY POSITIVE

We are maintaining our BUY recommendation and increasing our target to C$104 from C
$102. The increased target reflects slightly higher forecast adjusted EBITDA, partially offset
by higher valuation-period net debt resulting from the greater-than-forecast Q1/24 FCF
usage. Our updated adjusted EBITDA estimates primarily reflect the carry forward of a
portion of the stronger-than-forecast Q1/24 margins.

Bombardier reported a good quarter that provided the equity market with confidence in
certain metrics that had previously and, in our view, incorrectly been a concern for market.
The stock moved up 8% on the day which demonstrates equity market enthusiasm for
the highest margin in over 20 years, and the 1.6x book-to-bill ratio which depicts cyclical
health and suggests a strong competitive position for the company's product portfolio. In
previous quarterly reports, significant FCF usage early in the year, which was the case again
in Q1/24, seemed to be a concern. This quarter, the market appears to be looking past early
cash outflows, accepting that it should reverse over the course of the year, and instead
focusing on what we believe is a significant fundamental undervaluation for a business that
has numerous appealing investment attributes.

We forecast 2024 and 2025 EBITDA margin of 16.0% and 18.0%, respectively, with margin
expansion driven by higher aftermarket services revenue growth, increased deliveries, and
mix shift. Our 2025 adjusted EBIT margin forecast of 12.9% compares to GD's (BUY; current
price $284.94; target $315.00) 2024 EBIT margin guidance for its Aerospace segment of
15.0%, suggesting additional upside to margins in the long term, in our view.

2024 guidance was re-iterated and continues to imply strong revenue and earnings growth,
strong (albeit down y/y) FCF and declining financial leverage. As expected, inventory
investments should continue in Q2, although moderating sequentially. The company is
hosting an Investor Day on May 1, and we believe the 2025 leverage target is the most
likely (and potentially only) metric to be updated. 

[llesage]

Thanks again for all these Tempo!