Bombardier (OTCQX:BDRAF)(OTCQX:BDRBF)(OTC:BOMBF) continues to be in a fragile state. While the company will be able to deleverage its balance sheet by selling its rail transportation unit to Alstom for $8.4 billion next year and become solely a corporate jet manufacturer, we believe that its future still looks bleak. As the founding family continues to have the majority of the voting power in the company, there’s no guarantee that it will not fail to create value this time, considering that, under its leadership, Bombardier suffered immense losses by developing and later selling at a loss its own civil aviation project to Airbus (OTCPK:EADSF). In addition, by operating in a small and saturated business jet market, it will be hard for Bombardier to drive growth in the following years. For that reason, we continue to believe that there’s no value left in Bombardier stock and the opportunity cost of holding its shares is too high even at the current price.

Weak Growth Prospects Ahead

Bombardier’s stock declined by more than 20% since we published our latest article on the company in July, and there’s every reason that its share price will either decline even more in the following months or it will be trading at the current levels for a while. The reality is that Bombardier was struggling to create value for years, and it was able to survive for so long, mostly thanks to the help of the government of Quebec, which supported the business through various financial instruments and programs. After spending more than $6 billion on its commercial aviation project, the company sold its stake in the project to Airbus earlier this year for less than $600 million and was left with an overleveraged balance sheet. As a result, Bombardier had no other choice but to divest its interest from the rail transportation unit, which recently was agreed to be sold for $8.4 billion to Alstom, to stay alive.

In our latest article, we said that we have concerns regarding the deal being approved since Alstom failed to receive clearance from the EU last year to purchase rail assets from Siemens. However, since the EU antitrust watchdog approved the Alstom-Bombardier deal a couple of weeks ago, Bombardier shareholders shouldn’t be worried about the possible bankruptcy of their company in the near term. After the deal with Alstom is closed earlier next year, Bombardier will become solely a manufacturer of corporate jets and will focus on the distribution of its Global 7500 flagship jet, which is currently the largest business aircraft in the world.

However, it’s unlikely that the corporate jet business will be able to create substantial value for the company’s shareholders in years to come. The latest earnings report for Q2 showed that Bombardier is still struggling to return to profitability. In Q2, its revenues declined by 37.4% Y/Y to $2.7 billion, while its adjusted EBITDA loss was $319 million, against a profit of $312 million a year ago. Also, due to the pandemic, Bombardier managed to deliver only 20 business jets, which represents a decline of 43% Y/Y, and at the end of the period, it had $12.9 billion worth of orders.

As of today, the biggest problem of Bombardier is its overleveraged balance sheet. While the company has $3.5 billion in liquidity, it has nearly $9 billion in long-term debt, and ~$1 billion of that debt matures every single year. However, once the deal with Alstom is closed, Bombardier will be able to wipe the absolute majority of that debt, boost its liquidity position even more, and avoid insolvency.

Source: Bombardier

Despite this, we continue to believe that Bombardier is not going to create a substantial value as a manufacturer of corporate jets. The overall corporate jet industry itself operates in a small and saturated niche market since it delivers less than 800 jets every year. Considering this, it will be hard for Bombardier to scale its operations in this business. In addition, a large number of Bombardier competitors like Dassault Aviation (OTCPK:DUAVF) and General Dynamics (NYSE:GD) are defense contractors, who don’t have business jets as their main business. This helps them to better minimize their downside and scale their overall business. As a result, most of them are profitable and trade at positive EV/EBITDA ratios.

Source: Capital IQ

In addition, there’s no guarantee that the corporate jet business will not fail like the company’s past businesses from the civil aviation field. The founding family, which was responsible for all the missteps of the company in the last decade, continues to have the majority of voting power and will continue to have an impact on the direction in which the business is going. We should not forget that Bombardier received over $4 billion in taxpayers’ money in the last few decades, and it also spent billions of its own money on its C-Series program in recent years and later sold it at a considerable loss. All of this happened while the founding family was in control of the company. Considering this, there’s every reason to believe that, if the corporate jet business also fails, the government of Quebec will no longer bail out Bombardier. A large chunk of politicians in Quebec are advocating against any further subsidies to Bombardier since the company doesn’t have any employment power anymore, as most of its plants in the region are now either sold or closed.

Considering all of this, we stick to our opinion that there’s no value left in Bombardier stock, and it’s safer and better to buy an index fund than waste your time holding the company’s shares.

Disclosure: I am/we are long DUAVF, GD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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