RE:RE:TD upgrading to 100$ Bombardier Inc. (BBD.B-T) C$50.20 Q3/23; Solid Quarters Becoming Normal For Bombardier
Event
Yesterday morning, Bombardier reported Q3/23 Adjusted EBITDA of $285 million, compared to our forecast of $245 million and consensus of $262 million.
Impact: POSITIVE
We are increasing our target to C$100.00 from C$92.00 and maintaining our BUY recommendation. The increased target primarily reflects the impact of a shift forward of our valuation period by one quarter and lower valuation-period forecast net debt. Our slightly higher 2023 and 2024 Adjusted EBITDA forecasts reflect carrying forward a portion of the stronger-than-forecast Q3/23 revenue, Adjusted EBITDA, and other minor modelling adjustments.
Our view of Bombardier remains unchanged. We believe that the valuation fails to reflect the execution, franchise strength, growing FCF, deleveraging and earnings resiliency to economic forces in 2024 and 2025. Bombardier reported a strong quarter, with revenue, Adjusted EBITDA and margins stronger-than-forecast, and a unit book-to-bill ratio (1.1x) that supports delivery growth through at least 2025. The 24% y/y increase in deliveries compares a decline of 23% at Gulfstream and flat deliveries at Cessna. Aftermarket revenue growth of 11% compares to competitors at 8% and 3%, respectively.
Management's outlook is substantially unchanged. The Q4/23 order outlook is strong, with management re-iterating expectations for a book-to-bill of 1.0x despite a significant step-up in planned deliveries. The company has secured the majority of required inputs to meet 2023 delivery guidance. 2025 targets for growth in deliveries, revenue, earnings, and FCF represent strong financial results, and look increasingly conservative, in our view. Opportunities for margin expansion include growth in Defense revenue, aftermarket-service revenues, Global 7500 pricing and efficiencies, and the gradual elimination of supply chain related inefficiencies. While we believe that Bombardier will eventually be considering the development of a new medium-sized aircraft platform for investment, beginning in the second half of the decade, we estimate that the related capital expenditure commitments will be manageable while generating strong FCF that allows for capital returns.
TD Investment Conclusion
We believe that Bombardier's business aviation franchise is strong and that the declining financial leverage, backlog, production plans, and free-cash-flow visibility justify a higher share price.