Bombardier (TSX: BBD.B) has been pioneer in making business and private jets for high net worth individuals and businesses. But in the current bear market every other company is going through a rough patch and Bombardier is no different. The stock has fallen nearly 50% in last one year. However, last couple of years have not been good for the company and the company has fallen by about 60% in last five years.
Bombardier is a global leader in aviation, and the share price reflected that a couple of decades back. To give context to matter, company’s share price was $600 and above 21 years ago and has fallen below $1 recently. The fall has been so brutal that management had to think about reverse split.
In this article, we will talk about the facts of reverse split for Bombardier and its impact on the share price. Also, we will see whether stock split makes the shares a pick for the portfolio.
Bombardier Stock Split: Facts about the Reverse Split.
Bombardier’s management on March 25th, proposed for reverse split in the range of 1:10 and 1:30 to be put in the annual general meeting on 5th May 2022. The primary objective quoted was to adjust the number of shares to a level comparable similar companies in terms of market cap on Toronto Stock Exchange. The market cap of Bombardier is nearly $3.6 Billion.
The proposal for the reverse split got passed along with couple of other proposals as Bombardier’s founding family controls a major stake in the company’s board due to dual class share structure. The final approved reverse split ratio is 1:25.
The share price was barely above $1 on 4th May before the shareholders’ meet and it plunged further below $1 post this meet. As per rules of SEC, any share having share price below $1 gets delisted and Bombardier was no exception to this rule and its share got delisted for a brief time period.
On 13th June 2022, after the reverse split, the shares began its trading journey again and the reverse split did not impress the investors. The share price fell more than 18% on the same day post reverse stock split. Share price fell from $20.35 on 13th June to $16.93 on 14th June 2022. It was a clear signal that reverse split was not acceptable to the broader range of investors and it only got approved due to founding family control over voting rights.
The number of shares reduced in the ratio of 25 to increase the share price in the same ratio. Bombardier has two different class of shares, Class A and Class B. Prior to the split, the Class A share count was 308,734,229 which got reduced to 12,349,369. Similarly, company had Class B share count of 2,134,347,470 which turned down to 85,373,898 due to share reverse split.
Bombardier Stock Split: Impact of Reverse Split on Share Price
In general, reverse splits are not taken positively by the market as it is indication of the fact that company’s shares are not doing well on the stock exchange and it needs an artificial push to sustain its position. In case of Bombardier, it was more visible as company got delisted due to lower share price and reverse split was more of inevitable for the company to remain listed on the stock exchanges.
Any type of split either forward or reverse do not create any real value for the company. It only creates psychological impact on the investors. A forward split quite often creates positive sentiments as share price had a fantastic run in the past, requiring a forward stock split and a reverse split often creates negative sentiments as it is seen as a last measure to safeguard the falling share price. But any type of split does not determine the share price in the longer run, it can only provide short term push either upwards or downwards.
A seemingly positive impact of reverse split for Bombardier is that it takes away the image of penny stock of the company’s share. A label of penny stock (share price below $5) can be discouraging for the institutional investors to invest in the stock. A penny stock is also averted by retail investors and are only meant for manipulations in the Futures and Options and earnings some quick bucks out of it. Any person planning to invest for a longer time frame, like retirement does not and should not invest in penny stocks.
Bombardier Stock Split: Positives and Negatives of the Business
For start, Bombardier is a well-known name in the market for the manufacturing of the jets. Currently, they have more than 5000 jets manufactured and operating across the world. Also, the company was known for underperforming in the financial results, but that seems to have changed recently.
Company hit a revenue record of $1.2 billion in revenue and delivered 21 aircrafts and is on the track to deliver 120 numbers in 2022. EBITDA rose 36% YoY to $167 million, and the financial quarter results are beating estimate in every quarter. At the times of Covid, there was a decline in sales, but the company is coming out of woods and recovering well.
However, recently there are negative sentiments generating among the workers if the company. Bombardier’s Challenger and Global aircraft are known for their skills and cutting edge innovations, but recently according to a news report, Challenger business jet family consisting of nearly 1800 workers walked off the job with the union support.
There is a growing dissent regarding contract clause for five years stating a wage increment of only 2.5% per year. Workers’ stated that this would not keep up with the increasing living costs. The union is still negotiating the new contract with the management.
Also, what we see today in the form of Bombardier is only a fraction of what it used to be in the past. It is forced to sell rail and commercial jet business for reducing the mountain of debt. Now it only deals with the manufacturing of the private jets, which goes through cycles of demand. It is a supplementary expenditure and demands could plunge with the global recession fears come out to be true.
Bombardier Stock Split: Does Reverse Split Makes Bombardier a Buy?
The answer to the above question is a big No. However, starting with the reasons, first and foremost being that split does not add value to the company or the share. Secondly, a reverse split is always a sign that business is going through some troubles. The management does not ever go happily for a reverse split and many a times they are forced to act depending on the share price, Bombardier is a typical example.
Lastly, for Bombardier, business looks fragile and is very cost intensive. Although company is coming up with good results, but that is just post Covid recovery. It is better to sit on the sidelines to watch the stock for few more quarters before adding it in portfolio.
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