Waseem Sayegh

While Bombardier has strong cash flows, we believe that it has low quality of earnings, because these cash flows diverge significantly from its reported earnings:

• Its inventory valuation and cost of sales involve very large “program estimates”. If these estimates change by even 1%, the resulting difference is about 30M. Furthermore, they appear to be managing their excess over average production cost account (EOPAC) to smooth income.
• They appear to have taken a “big bath” when they restructured in 2003-2004, creating “restructuring reserves” and expensing special items in such a way as to smooth earnings.
• Bombardier has an aggressive revenue recognition policy with its airplanes. While its competitors only recognize revenue when the plane is delivered. Bombardier often recognizes it when the customer gives signoff on “interior fitting”.

While Bombardier is able to meet its short term obligations, it nevertheless has a bad credit rating. Moody’s and Standard and Poor’s have both rated Bombardier as being slightly below investment grade. Part of the reason for this is Bombardier’s very high level of long term debt, as compared to the industry average.

Furthermore, Bombardier has a very low operating profit margin, and seems to be relying on its high asset turnover. Given the steep global competition that Bombardier faces, many analysts are predicting that it will continue to lose market share. After all, its direct competitor, Embraer, is more liquid, much more profitable, and significantly less indebted than Bombardier.

Due to the aforementioned reasons, we recommend that Investa Group sell off its current holdings in Bombardier.

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