Bombardier: A great Canadian value destroyer

Ryan M Jun 08, 2015

Bombardier is one of those Canadian household names that everyone seems to know. It is also a well-known name amongst investors, for better or worse, but usually for worse.  In the midst of what seems like a consistent news flow on delays of the C-series, job layoffs, a sizable equity offering, dividend cuts, and talk of a rail unit spin-off that appears to be more of a stop-gap measure than any sort of positive strategic move, it seems as though the investment community has been relatively quiet. Where is the talk of taxpayer dollars being lost? Where are the stories about significant layoffs that seem to occur on an almost annual basis? Or have things been so bad for so long at Bombardier that we have become desensitized to the news, and it is just another story? We wanted to take some time to look at some of the issues that have faced Bombardier and why it is just a company we would ignore when it comes to investing:

Job Cuts: Job cuts happen and they are often a necessary reality but usually a company learns from mistakes and does not repeat them. Mistakes happen and downsizing often occurs, but then the company levels off and at least maintains headcount if not grows. Bombardier however, seems to have job cuts scheduled in their annual calendar. Here is a quick list of some cuts we found since 2009 at Bombardier:

4/2/2009 – Bombardier Aerospace to cut 3,000 jobs

6/22/2010 – BBD cuts 185 workers

7/4/2011 – BBD cuts 1,400 workers in Britain

11/7/2012 – BBD cuts 1,200 rail unit jobs

1/21/2014 – BBD cuts 1,700 Aerospace jobs

5/14/2015 – BBD to cut 1,750 jobs

These are not small numbers and those are a lot of people left without a job. What is most sad/interesting is that aside from a news story detailing the actual event, you do not seem to hear much about it anymore. To take an alternative view, if these were auto-companies that instead of laying people off due to poor operations, were moving jobs to another country; people would be outraged and citing tax dollar support and a race to the bottom.  These are really two sides of the same coin. Taxpayers are supporting these types of companies and a job lost is still a job lost, whether or not it was moved somewhere else. At least in the case of an auto-manufacturer they are remaining competitive and (hopefully) still producing profits that can be taxed. So what does this have to do with investing? It relates to a past blog where we talked about allocating resources to assets that continually underperform. Why bother with investments that continually erode shareholder value when there is so many companies that are doing the right things and why allow ‘good’ tax dollars chase after bad businesses?

Dividend Cuts: BBD has returned some cash to shareholders and that is a good thing but they are not what you would typically define as a stable dividend payer. Going back to 1995, BBD paid a $0.013 dividend, which increased, to $0.045 in 2002. The dividend was then cut to $0.023 in May 2003 until it was eliminated in 2005 only to be reinstated at $0.025 in 2008.  The dividend remained steady until recently and has been cancelled once again. So what is the lesson here? Either the cyclicality of the industry does not complement the payment of a dividend or the company has not prudently managed the dividend. Either way, if you are a dividend investor, this is probably not an investment that should be high on your list.

Pay Cuts (via share dilution): This is something we hate to see. It is less of an issue in our minds when companies are hitting new highs but when a company is essentially trading at the same level it was 20 years ago and decides to do a $938 million equity offering, it is tough to stomach. Not to mention that this goes along with news of a layoff and a dividend discontinuation essentially three months later. Points do need to be rewarded to the company however, as up until now, BBD has done a good job of keeping the share count stable.

Still not convinced that Bombardier has a knack for destroying shareholder value? Let a 20-year performance chart do all of the talking then: 

Yes, there was a nice bubble forming in the early 2000’s but aside from this spike, you can pretty much draw a line straight across the chart. Some investors may have been successful at timing BBD and profited handsomely but since here is a buyer to every seller; it is safe to assume that many have fared much worse with an investment in this company. A passive TSX composite investment would have fared an investor much better without the roller coaster ride in price. So why does this company continue to get so much attention?

We think there are two factors at play. The first is the valuation coupled with a low price. If there is one thing more attractive to investors than a ‘cheap’ valuation, it is a cheap valuation at a low nominal price. Psychologically it just looks better and investors feel like they can lever up by buying a large number of shares. Obviously, if we look at prices and returns on a percentage basis, it is clear that this is not a correct way to view things but it is tough to overcome these types of biases and a cheap looking stock at a cheap looking price that is also a $6 billion dollar company is tough to ignore. Unfortunately, while BBD looks cheap, we think BBD is cheap for a very good reason.

The other factor at play is likely a by-product of the Canadian investment landscape. Quite simply, there are very few companies in Canada that are like Bombardier and because of this, institutions tend to ‘need’ to hold it in their portfolio. As a long time member of the TSX Composite Index, there are no real comparisons in Canada for Canadian investors to own. Thus, for a mutual fund manager (and certainly for an index manager), not owning shares in Bombardier is like betting 'against' it. While we would have no issues with this, a fund manager simply cannot afford to be wrong on a bet such as this. So, they suck it up, own it, and then buy more shares when it issues equity. The fact that they are subordinated voting shares does not seem to matter, although we think it clearly should.

So what is an investor to do? We have no doubt that a company such as BBD can make some investors money but we just do not think this is a name that is worth an investors’ time and effort. Investing in a company that has made a misstep here and there but on the path to recovery can be a profitable strategy but investing in a company that has had a consistent history of problems and a questionable history with creating long-term shareholder value can be a recipe for disaster. There are simply too many well-run companies out there to bother with the laggards.  Continuing to invest in companies that perform poorly and expecting them to all of a sudden ‘turn things around’ reminds us of the classic Albert Einstein quote: “Insanity: doing the same thing over and over again and expecting different results”.

3 comments
J
Jeff
Jun 13, 2015
Thanks to Peter's comments on this stock in 2013 at $4.80 I dumped this turkey out of my TFSA. The funds went in part to AYA (yay) and WIN (boo-hoo).
R
Ryan
Jun 12, 2015
Thanks Sarj, give us some time and we will see what we can do. Glad you enjoyed it.
S
Sarj
Jun 11, 2015
Great article, would you be able to write one for a company that is the opposite and a great value creator?

Thanks.