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Written by Puja Tayal at The Motley Fool Canada
The year 2025 has been one of the best years for Bombardier (TSX:BBD.B) while other Canadian stocks struggled. Bombardier’s share price jumped 116% year to date, outperforming the most popular growth stock, Shopify, which rose 50%. With this rally, its valuations have reached a new high. Its enterprise value (EV)/ Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) has reached 15.6 times, and the price-to-forward earnings ratio sits at 20 times. Now it is losing altitude, with the stock falling almost 10% in two days.
Bombardier has come out of its turnaround and has rallied on the new growth prospects from its flagship Global 8000 aircraft. The company is also looking at the defence vertical to monetize its Global and Challenger platforms. Bombardier CEO Eric Martel stated that Bombardier aircraft’s reliability, range and ability to operate at high altitudes make them suitable for demanding missions with slight modifications.
When it comes to modifying business jets for defence, it is not proposing to make fighter jets. Bombardier is making jets for airborne surveillance and border and maritime patrol. Since the base platform is Global and Challenger, and modifications are made through partnerships, the risk is low.
How much growth can the above initiatives bring?
Bombardier is seeing growing demand for its aircraft, with order backlog rising to US$16.6 billion in the third quarter from US$14.4 billion in the same quarter a year ago. Even today, most of its $9.3 billion estimated revenue for 2025 comes from business jets. It expects the defence segment to contribute revenue between $1 billion and $1.5 billion by 2030.
Considering that Bombardier is anticipating aircraft deliveries to plateau at 150 from 2025 onwards, a price-to-sales ratio of 1.7 times is high. Thus, there is no strong investing case to buy this stock at such high valuations. That explains the recent correction of 10%.
However, the prospects of joint ventures and collaborations could trigger the next growth cycle. For instance, the recent talks with Saab to bring Gripen fighter jet production to Canada hinge on many moving parts. Saab manufactures fighter jets in its home country, Sweden. Setting up a plant in Canada will require a good order from the Canadian government.
The Canadian government has allocated an $80 billion budget for the Canadian Armed Forces over five years. The ongoing trade issues with the United States encouraged Canadian Prime Minister Mark Carney to order a review of the F-35 jet purchases from the U.S. If the Canadian government decides to extend the made-in-Canada campaign to defence procurement, Bombardier could be a beneficiary in fighter jets.
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If the government is using taxpayers’ money to help Bombardier get the order, the company will be closely monitored because of its tainted history of governance issues and misuse of bailout money by previous management, which gave hefty bonuses to bosses while the company suffered from near bankruptcy.
The company continues to reduce debt and boost free cash flow. The fourth quarter is when maximum aircraft deliveries are made, and revenue is realized. However, the 116% rally has already priced in the seasonal growth, launch of the Global 8000 series, and new defence orders.
I have been bullish on Bombardier all this time, but the share seems to be priced to perfection with limited upside potential. If you own Bombardier stock, now may be a good time to sell it and book the profits of the first phase of growth.
Bombardier’s journey as a growth stock may phase out, and a new journey as a dividend stock may begin in the medium term. If you are looking for growth, now is a good time to seek new opportunities coming from the shift in the global supply chain.
Descartes Systems (TSX:DSG) is just beginning to recover from the trade war dip. Some of its supply chain solutions, such as global trade intelligence and transportation management, were in demand throughout the year, bringing cash flows. The company took this time to make cash acquisitions and boost revenue. The next year could see Descartes facilitate new supply routes with its suite of various supply chain solutions, such as customs and compliance, inventory management, tracking, and more.
The post Bombardier Stock Is Losing Altitude Fast: Is It a Buy, Sell, or Hold Right Now? appeared first on The Motley Fool Canada.
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The Motley Fool has positions in and recommends Shopify. The Motley Fool recommends Descartes Systems Group. The Motley Fool has a disclosure policy. Fool contributor Puja Tayal has no position in any of the stocks mentioned.
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