Bombardier, Inc. (OTCQX:BDRBF) has received yet another government loan worth $372.5 million over the next four years for the development of its jet projects. The company has failed to stick to its budget, yet the Canadian government has once again bailed them out. This may come as a disappointment for management, who originally asked for US $1 billion, but is it enough to send the stock shooting up?
Bombardier has struggled with poor management decisions which have derailed the stock's performance for the past 10 years. Specifically, management has faced difficulty forecasting costs regarding project budgets. This is indicative of future need for corporate welfare going forward, and we believe the government will not continue to bail them out. The Canadian government has learned that their citizens are not receptive to these government bailouts after they have received backlash following the $3.5 billion-dollar bailout of Chrysler Group LLC and General Motors Co. (NYSE:GM) in 2009.
We do not think the company will be able to rely on the government for funding forever with the huge amount of controversy surrounding this loan. The federal director of the Canadian Taxpayers Federation, mentioned that the CTF has been pushing the government to reject Bombardier's request for funding. They believe the government is essentially "gambling" $372 million dollars of taxpayer's money. The Canadian government is also signaling doubt in Bombardier as they have only given over a third of the capital that was requested. Although there is huge upside if Bombardier can maneuver their way out of their current financial situation, the track record of the company suggests that this infusion of cash will be burnt through in the next few years, followed by another bailout request.
The company has a reputation of missing deadlines and going over budget, which has resulted in lost revenue for Bombardier. One of the biggest contracts the company has recently received from the city of Toronto has been delayed due to a slowdown in the production of a prototype for testing. The city has shown that they are losing patience with Bombardier as they have begun commissioning vehicles to other companies to create the 182 vehicles for the Metrolinx. This may result in the loss of over $1.2 billion in potential revenue. Bombardier has been publicly criticized by Toronto mayor John Tory as he stated that their failure to meet contractual obligations is a "complete failure". The city of Toronto has threatened legal action if the project is not completed by 2019. Government help has been providing major advantages internationally, but this may soon slow down as Brazil has recently said it is launching a trade challenge before the World Trade Organization over this support which has hindered the performance of a major competitor, Brazilian-based Embraer. The pressures from the World Trade Organization and the Canadian Taxpayers Federation will hinder any prospects of receiving government funding.
Bombardier is facing an uphill battle back to profitability, as their massive amount of debt will limit their ability to invest in future R&D. At this point we believe Bombardier is a speculative gamble, that is dependent on continued government support. We do not recommend taking any long-term positions in the company.
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