Bombardier May Be Going Places

Stocks can go up for lots of reasons. But one of the most alluring falls under the blandly suggestive title, "special situation." Encompassing reorganizations, asset sales, recapitalizations, spin-offs, buybacks, and more, such special situations often are full of confusion -- and potential for profit. Right now, I see something special going on at Bombardier (BBD.B ).

You may have encountered Montreal-based Bombardier any number of ways, from its railcars rolling through city subways to its Learjets and fleets of regional jets to its Sea-Doo jet skis and Ski-Doo snowmobiles. All of this and more made up a $17.3 billion conglomerate in the fiscal year that ended on Jan. 31. Problem was, pretax profit before one-time charges plunged by more than half, to $379 million, which punished the stock (chart). And Bombardier's credit rating, just one notch above junk status, could sink further as the airlines that buy its jets suffer their own credit squeezes and possibly delay or cancel deliveries.

A fresh economic downturn is a risk, too. Chances are, though, the trouble at Bombardier is temporary. Jim Parker, an airline analyst at Raymond James and perhaps Wall Street's closest student of Bombardier's customers, the regional carriers, told me that underlying demand for Bombardier jets remains strong. "The regional jet business is a good one," he says. Meantime, a new chief executive already has Bombardier well along a restructuring path. "This is a profitable company," CEO Paul Tellier said in a May 27 conference call as he reported a 59% drop in fiscal first-quarter net income, to $59 million. "What we have to do is make it more profitable."

CEOs say stuff like that all the time; Tellier, however, enjoys unusual credibility. A onetime law professor and Ottawa bureaucrat, Tellier took charge of government-owned Canadian National Railway in '92. Three years later, he took it public. CN shares have since returned more than fivefold, and net from 1996 to 2002 grew similarly. Tellier joined Bombardier's board in 1997. Last December, he left CN to take the top spot at Bombardier.

The company shouldered $8.3 billion in debt, or 80% of capital, on Jan. 31. Tellier widened a plan to shrink the finance unit, responsible for $5.8 billion of the debt, by 55%. Next, he halved the dividend and got Bombardier's banks to loosen a debt covenant while the company recapitalizes. Toward that end, Bombardier raised $854 million in an April sale of stock at $2.37 a share. It expects another $1 billion or so via asset sales, notably an auction for its recreational-products unit. The first round drew 15 bidders, and Bombardier expects to close a deal this summer.

By fall, then, Bombardier figures to have paid its debt down sharply. Surviving the corporate makeover will be two big operations of equivalent size: aerospace, which in the last four quarters took in $8 billion in sales, and transportation, the world's leading maker of mass-transit systems, which posted revenue of $7 billion in the past 12 months. Fortunately for Bombardier, as aerospace orders slow, the rail business is gaining speed. Bombardier's backlog at Apr. 30 stood at $35.6 billion, up from $32.8 billion the year earlier.

Not counting special items, Bombardier figures its net margin has been running at 3% to 3.5%. Assuming flat revenues, that indicates earnings per share this year of perhaps 20 cents. Yet profit would expand fast if Tellier, by cutting costs and focusing on profitability over maintaining market shares, meets his goal of doubling margins. The shares, lately trading near $2.80, could look cheap. What might draw investors' attention? To date, the stock has traded only in Toronto, Frankfurt, and Brussels. Tellier is bent on listing as soon as possible on the New York Stock Exchange as well. If so, count on the Big Board's spotlight to show more people what's special about Bombardier.

By Robert Barker

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