Bombardier Tumbles After Cutting Forecast on New Rail Woes
(Bloomberg) -- Bombardier Inc. fell the most in five months and bonds plunged after the company cut its 2019 sales and profit forecast amid new struggles at its train-making business.
A slower production ramp-up on some rail projects dented first-quarter revenue and accounted for most of the $1 billion cut to the 2019 sales outlook, Bombardier said in a statement Thursday. The timing of aircraft deliveries also hurt first-quarter results, though the company said it should be able to recover the shortfall during the rest of the year.
“We had a soft first quarter driven by the timing of aircraft deliveries, foreign-exchange headwind and a slower production ramp-up at Transportation,” which makes trains, Chief Executive Officer Alain Bellemare said in the statement.
The weaker forecast adds to the pressure on the rail-equipment division, Bombardier’s biggest, which has been plagued by missteps on high-profile projects in New York, Toronto and Europe. Bellemare, who is in the fourth year of a five-year turnaround plan, is counting on the business for about half of Bombardier sales as he pares the commercial-aircraft business to focus on making trains and private jets.
“This company has been in a state of constant restructuring, it’s been a consistent over promises under deliver,” said John O’Connell, CEO of Toronto-based investment manager Davis Rea Ltd.
The timing of the forecast cut is “dodgy,” considering that Bombardier just engaged in a round of liability management last month, O’Connell said, extending the duration of its debt and bolstering liquidity. The company sold $2 billion of eight-year notes in February.
The bonds dropped as much as 4 cents, the most since they started trading. The cost of insuring the company’s bonds in credit-default swaps markets for five years widened 66 basis points to 422 basis points, the most since Nov. 16, according to data provider CMA.
The company’s widely traded B shares sank 15 percent to C$2.48 at the close in Toronto, the biggest drop since Nov. 16. That pared Bombardier’s advance this year to 22 percent, slightly ahead of the 20 percent gain for a Standard & Poor’s index of Canadian industrial companies.
Citigroup Inc. cut its 12-month price target on Bombardier to C$3.40 from C$4 in a note to clients about the “negative surprise” from the rail business.
“Although the company’s transport segment has been relatively stable in recent years, it would be unreasonable to dismiss the possibility of additional volatility from this segment,” analyst Stephen Trent said in the report.
Sales from rail will be about $750 million lower for the year, as Bombardier seeks to better synchronize output with customer demand. Revenue will take an additional $250 million blow because of fewer aircraft deliveries, as the sale of Bombardier’s Q400 turboprop program closes by mid-year, more quickly than expected. The $1 billion drop in the sales forecast, to $17 billion, represents a decrease of 5.6 percent.
Earnings before interest and tax will be $1 billion to $1.15 billion, Bombardier said. The previous forecast was $1.15 billion to $1.25 billion. The outlook for free cash flow, a closely watched measure, was unchanged at break-even plus or minus $250 million.
The Montreal-based company is scheduled to release its full first-quarter earnings report May 2.
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