Bombardier stock plunges in heavy trading amid revised Aerospace outlook

MONTREAL – Bombardier stock plunged more than 25 per cent in heavy trading Thursday following a revised outlook for its aerospace business, including plans to put development of the Learjet 85 business jet on hold, eliminating 1,000 jobs in the United States and Mexico.

On the Toronto Stock Exchange, the Montreal-based company’s shares dropped $1.07 or 25.85 per cent to a more than two-year low of $3.07 on a very heavy volume of some 65 million shares.

The aerospace and rail equipment manufacturer said before markets opened that it would “pause” development of the Learjet 85, but continue to sell other models and focus on two other aircraft programs — the Global 7000/8000 business jet and the much-delayed CSeries passenger jet for commercial airlines.

About 600 employees who worked on the Learjet 85 will be switched to the Global and CSeries projects, the company said.

President and CEO Pierre Beaudoin said slow sales and weak prospects for improvement in the midsize business jet market were behind the Learjet 85 decision, not further technical problems whose first flight was delayed until last April.

“It’s a market that has not come back since 2008 and we think that the right decision for the company right now is to take a pause,” he said during a conference call.

The company will write down the value of its Learjet 85 program, resulting in a pretax charge of about US$1.4 billion in the company’s fourth quarter and US$25 million for severance in its first quarter of 2015.

Meanwhile, Bombardier also trimmed its 2015 margin guidance and said cash flow from its Aerospace division will drop to US$800 million from prior estimates of between US$1.2 billion and US$$1.6 billion.

Beaudoin insisted the company’s access to US$3.8 billion of liquidity, including US$2.4 billion of cash, is sufficient to fund its development programs.

But at least one analyst said the lowest cash position in years raises the possibility that Bombardier may resort to selling stock to improve its financial cushion — a move that would be negative for current shareholders.

David Tyerman of Canaccord Genuity also said the credibility of Bombardier’s management is likely to take a major hit from Thursday’s announcement.

“We already perceive that investors have a poor opinion of management and this will likely make it worse,” Tyerman said. “It also will likely lessen investor/analyst confidence in management’s forward-looking guidance. We regard this as a major issue with potential negative implications for the company’s valuation multiple.”

Aerospace analyst Richard Aboulafia of the Teal Group said the decision to shelve the nearly US$21 million Learjet 85 is really about the need for cash to complete the CSeries, whose costs have increased to about US$4.5 billion.

“They’re really getting into crunch time in terms of the CSeries relative to their company finances,” he said in an interview.

Aboulafia scoffed at the suggestion that the decision was tied to the market outlook, saying it will help rival Embraer’s Legacy 500 to succeed in a segment that is showing signs of recovery.

Beaudoin denied that Thursday’s announcement signals that Bombardier is in peril.

“We have a product line where we are the global leaders in business aircraft, regional aircraft and in our train business,” he said. ” . . . Obviously it’s a difficult decision today but it’s a necessary decision in relation to the size of the market of the Learjet 85.”

Beaudoin said the company also has concerns about the recovery of the market for smaller Learjet 70/75s but has benefited from strong demand for large, long-range Global business aircraft.

But Cameron Doerksen of National Bank Financial says there is a risk that demand for these larger planes could also soften, pointing to political turmoil in Russia, slower demand in China and the impact of lower oil prices on sales in the Middle East.

The Learjet announcement follows last year’s elimination of 2,900 positions around the world — 2,000 non-union administrative jobs at Bombardier Aerospace and 900 at Bombardier Transportation, the company’s rail equipment division. It laid off more than 200 workers last June because of delays in the Learjet 85 flight test program.

And several senior executives, including former aerospace president Guy Hachey, have left the company since an engine failure ground CSeries test flights for several months.

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Note to readers: This is a corrected story: A prervious version incorrectly stated the percentage of the drop in stock prices