French Train Maker Alstom Just Went Off The Rails

French Train Maker Alstom Just Went Off The Rails
Stéphane Renevier, CFA

5 months ago2 mins

What’s going on here?

All-round train aficionado Alstom’s stock tanked on Thursday.

What does this mean?

Trains are Alstom’s baguette and butter: the French company makes money by designing, making, and servicing trains like the Eurostar and metro systems in cities from Paris to Sydney. That heft has also won it major international projects, including the UK’s controversial high-speed HS2 train, which has been grabbing headlines after key planned coverage areas were cut off by the British government. But on Thursday, Alstom dropped a major truth bomb. Despite previously positive predictions, the company just forecasted that its free cash flow – that’s profit left after big project outlays – this year will wind up roughly $525 to $790 million in the negative. That got investors moving faster than those nippy trains: the firm’s share flew down by 37%, wiping over $3 billion off its valuation.

Alstom stock
Source: Google Finance

Why should I care?

For you: You can’t trust anyone these days.

Alstom’s quick one-eighty makes you wonder whether the firm was using a dartboard for its predictions. And this won’t just cast doubt on Alstom’s credibility: ripple effects could also impact its credit rating and shake investors’ long-term confidence, pushing them to steer clear of its shares and bonds. That’s a timely lesson: with the earnings season right around the corner, remember to take a company’s words with a grain of salt.

The bigger picture: Retail therapy doesn’t always help.

A handful of Alstom’s qualms can be tied to its acquisition of Bombardier's rail division three years ago, which has been far from a smooth ride. Initially valued at nearly $8 billion, the purchase was reduced by over $2 billion due to financial issues with Bombardier's UK and German projects. Plus, Bombardier came as a package deal with the British Aventra project, a fleet serving key lines like the London Overground. The project’s since been plagued by numerous delays and was a major factor in those reduced cash flow projections.

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