MONTREAL — Alarm bells should have sounded way back in March, reported the Montreal Gazette.
That’s when Bombardier Inc. president Robert Brown said the company would no longer be making its five-year revenue-and-profit forecasts.
For years, such forecasts painted a rosy picture of sales that would double every five years and earnings that would rise even faster.
But on March 19 at the Royal York Hotel in Toronto, Brown said such predictions were “no longer useful.”
Since then, the company’s woes and battles have been laid bare, especially at its aerospace division – reduced profit prospects, thousands of layoffs, the sale of assets to pay mounting debt, production cutbacks – and an iffy outlook in the aviation sector.
This came after a $300-million lawsuit against its client, U.S. rail operator Amtrak – which Bombardier hopes will become a major client – a separate $1-billion (U.S.) claim against DaimlerChrysler, from which it acquired German rail company Adtranz, and writedowns at Bombardier Capital from bad loans it extended in the manufactured-housing market.
Bombardier’s stock has taken a beating, falling 84 per cent from nearly $25 a year ago to its current price of about $4 per share.
The slump is bad in and of itself.
But when contrasted with its previous stellar performance, especially since 1997, over which time the stock split several times and the company was racking up sales and profit growth year after year, the collapse appears complete.
Does that make Bombardier another corporate basket case? Or have reports of its unraveling been exaggerated?
More the latter, contend observers, including most analysts who have relentlessly pounded away at the Montreal-based transportation company since its problems began spiraling in recent months.
Comparisons with Nortel Networks might have been inevitable but don’t stand up to scrutiny, said Elvis Picardo, an analyst with Global Securities Inc. in Vancouver.
Things might be bad now, but the problems are a function of the economy, not an inherent structural problem at Bombardier, Picardo said.
“I mean, we’re very close to a global recession, perhaps on the brink of one – in the U.S., Europe and Japan.”
But when that shakes out, “this company will survive and do well,” Picardo said. “I continue to believe the reaction has been overblown.”
A generous portion of the blame for that can be placed on the company itself.
“Hindsight is always great,” said Dlouhy Merchant Group analyst Cameron Doerksen.
“But the fact is that they did put out those estimates which didn’t pan out. They did it legitimately, but things changed and they were maybe a little too optimistic.”
And forget invoking the catch-all 9/11 as a wildcard the company could not have foreseen.
“The biggest myth is that 9/11 had anything to do with (Bombardier’s problems),” said Richard Aboulafia, an aerospace consultant with the Teal Group.
Its regional-jet division has weathered the downturn in airline travel well, unlike Airbus and Boeing – which announced its own $158-million (U.S.) charge yesterday on aircraft leased to money-losing air carriers such as United Airlines, hammering the giant’s stock.
And Bombardier’s slumping business-aircraft group, which is causing all the trouble, was thumped not by that dark day but by the economic downturn that began before.
Aboulafia also said the reaction to Bombardier’s problems “reached irrational extremes of fear” – and even added that “there sounds to me like there’s some short-selling going on.” A short-seller makes money by betting on a stock losing in value.
Aboulafia added that the whole business-aircraft issue has also been misinterpreted, especially in the business press.
“What’s the fear?” he asked.
“Yes, the market (for corporate jets, a high-margin segment that formerly contributed disproportionately to Bombardier’s profits) is down by about 25 per cent.”
“But by historical standards, this is a market between two and three times higher than anything we saw (prior to 1996).”
“So yes, there’s been some shrinkage, but from a base three times as high as six years ago.”
The problem, say analysts like Robert Fay of Canaccord Capital Corp., is that Bombardier’s forecast of how much of that new business it would corner was unrealistically high.
Some analysts have also questioned Bombardier’s accounting and reporting practices – calling them inadequate, and even misleading, allowing management to be much more vague than a large company should be.
A case in point is the Bombardier Capital division, which has racked up three special charges on bad loans – the last one an astonishing $663 million.The company bundled the announcement with more dramatic news of layoffs two weeks after the terrorist attacks of Sept. 11, 2001.
Another is the fiendishly complex workings of the company’s aircraft leasing and sales of used and new jets – which could be manipulated to mean whatever management wants at a given time.
One structural problem Bombardier must address, said Picardo, is the profit margin on its rail business – a margin just over 4 per cent before special items, taxes and goodwill amortization, or less than half that of the 10 per cent posted by its aerospace business.
But Aboulafia said that whispers of bankruptcy or financial impropriety at Bombardier are outlandish.
“I think the burden is kind of on the people who make those claims to produce evidence,” Aboulafia said.
“I mean, these people may have misjudged, but they’re smart, honourable people.”
Still, unrealistic promises of profits to come, promises on which investors based their stock purchases, did cause mayhem. Shareholders gave up on the company in a frenzied selloff after last week’s announcement of job cuts.
Tulinda Larsen, of Back Aviation Consulting in Washington, D.C., noted that “saying I’m bullish on Bombardier is a little strong.”
“But of all the companies in their business, they’re in the best position, I think. They’re diversified and that will pay off.”
The problem, said Picardo, is when the payoff comes.
“I also believe Bombardier is a compelling buy, but it’s really hard to see when that point will be.”