Bridger Aerospace: A Wildfire Stock Not On Sale (NASDAQ:BAER)

When covering the aerospace industry, probably the last company I would have expected to cover is a company active in aerial firefighting and surveillance, but here we are. When looking at new aerospace names, I found Bridger Aerospace (NASDAQ:BAER) and the name of the company already is somewhat of a misnomer, because, upon closer inspection, I found that the company is active in aerial firefighting and wildfire management services.

However, aerial firefighting is a hot topic. When I completed my Design Synthesis Exercise to secure my bachelor’s degree in Aerospace Engineering a couple of years ago, there was a wide array of topics to demonstrate my skills. I chose to participate in a group tasked with the design of an environmentally friendly and cost efficient next generation single aisle jet, but there also were possibilities to demonstrate and deepen my knowledge in the field of aerial firefighting. Being the son of a firefighter, the combination looked appealing to me. The fact that aerial firefighting subjects were among the DSE topics shows there is an innovative need for new developments in that area and it is rather clear why as I discuss in this report highlighting the business case, the business itself, risk to the business, and make an attempt to come up with a stock price valuation for the aerial fire fighting specialist.

Fire Is The Business Case

The business case for Bridger Aerospace is rather obvious. With the risk of wildfires increasing, there is more surveillance and firefighting activity required. But let’s first look at the data, because while you might get the impression there are more wildfires these days, we still need to assess whether this is actually the case.

Looking at the global number of wildfires, we see that generally, the peaks are getting higher indicating more fires in the typical wildfire season. The trend is rather clear but involves many factors including precipitation outside of the season which somewhat reduces the risk of fires outside of the season but also means that during the delayed season there is more burnable material. So, climate change which includes more extreme weather patterns certainly does add to more extreme wildfire seasons.

Data from the Environmental Protection Agency shows that in the US, we don’t see the same alarming pattern as observed globally. So, in that sense, Bridger Aerospace does not have a business case that leans on an increasing number of wildfires.

What we do, however, see is that the area burned is increasing. We are not so much looking at the highs in the graph to come to that conclusion, but we look at the lows, which are rising. On a relatively flat number of wildfires per year, we can conclude that the area burned per fire is on the rise. From 1991 to 2021, the area burned per wildfire has increased 25 to 30 percent. So, there is some urgency in fire prevention as well as adequate fire fighting capacity including aerial fire fighting.

Looking at the damage due to wildfires, heat, and drought, we see that since 2018 there has been a significant increase the dollar value damages. In recent years, there has been some tapering in the damages. Wishful thinking would conclude that this is because of the fire-preventing measures, but there are many factors involved such as the location of the wildfires that determine the damages and the high-risk and human tragedy itself already demand more investment in fire prevention and suppression.

With a growing number of houses built in urban-wildland, the damages and risk to human life also increase and it is resulting in higher spending which is important to Bridger Aerospace. We see that the air-based suppression accounts for 43% of the firefighting market and we see data as a small but important add. Beyond that, we see overall wildfire suppression spending continue to grow. All of that is driven by the higher intensity and higher risk of wildfires. Beyond that the emissions from wildfires are significant, so while wildfires are partially caused by increased emissions fighting is also important to reduce the emissions from those fires.

What Does Bridger Aerospace Do?

Bridger Aerospace does not only fight fires with aerial vehicles but it also is active in the area of surveillance. Its fleet reflects that. The company has six aerial firefighting vehicles, 10 air attack and surveillance airplanes and 12 smoking jumping and special transport airplanes for firefighting purposes.

The Super Scooper are the airplanes doing the heavy work and perhaps the good news for Bridger is that there aren’t many Super Scooper airplanes active in the US. The company recently won the bid for four Scoopers from Spain. The Super Scooper production is a very low-rate production program that might face continuation challenges at times, but Bridger Aerospace is expanding its capacity by purchasing second-hand airplanes as other parties renew their fleet.

The twelve smoke jumping and special purpose transport planes come from the recent acquisition of Bighorn Airways which could also provide a more diverse revenue stream if Bridger is able to deploy the airplanes on off-season transport missions. Furthermore, the company has surveillance aircraft which can be used for mapping and data analytics during fires but mostly to prevent them and I would expect that with wildfire seasons getting more intense, spending on analytics will also increase for the simple reason that prevention is better than cure. Bridger Aerospace for instance uses the data to map live wildfires in a downloadable app, which could potentially be lifesaving.

What Are The Risks For Bridger Aerospace?

Wildfires are seasonal appearances, which means that Bridger Aerospace’s financial results might fluctuate. For instance, while normally the wildfire season peaks around July/August, this year’s season was somewhat delayed by the wet spring after which the wildfire season in the US unleashed. Bridger Aerospace has several ways to cope with that. Via Bridgehorn, it can offer specialized transports to government customers while continued surveillance and continued funding for surveillance provide out of season padding. At this stage, it is also important to keep in mind the global development of wildfires and not solely in the US. This year, Canada saw significant wildfires and Bridger Aerospace has been certified to carry out operations and expects those operations to become a part of the company’s business while the company is also active in Europe. Europe saw significant heat throughout the summer including Italy and Greece. If not for the local population, those countries are invested in fire prevention and firefighting as they have a flourishing tourism sector. So, geographical end market diversification and increased need for firefighting bodes well for Bridger Aerospace.

A possible would be a shortage of airplanes. The Super Scooper which is the core of the Bridger fleet is produced at low rates, and while I don’t expect the production to be halted, it could happen. In that case, the feedstock of second-hand airplanes could dry up rendering the company unable to scale and better amortize costs. However, with an increasing number of wildfires globally and more area burned, it would make little sense to halt production of aerial firefighting airplanes, and even if it does happen, it makes the services and capacity of Bridger Aerospace higher value as supply falls short of demand.

Two risks that Bridger Aerospace is subjected to pertain its ownership structure. The company has Series A preferred shares that are mandatorily redeemable in April 2032 with a conversion price of $11 per share. Preferred shareholders may elect to convert after April 2027, and unless the company’s common stock is worth more than $11, there is no reason to do this. Bridger Aerospace may also elect to redeem the preferred shares or a portion starting in April 2027 in which case it can dodge the hefty dividends due that could increase to 11% by April 2029. So, there is some dilution risk in case the conversion takes place and there is some risk of significant cash outflows as the redemption price is the preferred stock fair value plus any unpaid dividends. The redemption will look a lot like debt redemption in case a conversion comparable to debt-to-equity will not take place. Right now, the fair value of the Series A shares is $342.7 million. With little over $13 million in cash and equivalents, it is clear that redemption is only viable in case the company can secure additional debts or its results improve significantly. It is not the case that each preferred stock will be one-to-one convertible. If redemption were to happen now, it would result in the common stock pool increasing by 31.15 million

The second risk is that the company has warrants that can be exercised which would increase the common stock pool by 0.46 million. Currently, there are around 45.4 million shares outstanding which points to possible dilution of existing common stockholders of 52% percent if everything is converted instead of redeemed by the company. So, the preferred path for shareholders is for Bridger Aerospace to actually redeem the preferred stocks gradually instead of conversion.

What Is Bridger Aerospace Stock Worth?

Bridger Aerospace is not a name that gets a lot of coverage, so coming up with estimates is rather difficult. Especially since the company has a negative EV/EBITDA at the moment and I had to use the industry valuation as well as a general alpha for SPACs since Bridger Aerospace is not public long enough to derive a 1-year or 3-year alpha. Upon crunching the numbers, we get a sell rating which is not odd given the relatively cash intensive nature of the expansion that the company has to carry out. Perhaps the rating of a sell is somewhat harsh as my model is geared towards more established companies and not companies that are in their initial phases. If we consider an industry valuation, we would see that the company is more or less fairly valued and slightly valued. So, while the rating is a sell according to my screening method. Perhaps for Bridger Aerospace this is more of a high-risk hold that depends on a significant expansion to be worth its current stock price. So, there definitely is no fundamentally driven upside based on my assumptions for the company and the longer-term risk of not scaling the business as desired and a possible eventual dilution or cash intensive dividend payment or redemption for preferred shareholders is also a risk to the business. So, Bridger Aerospace does not provide imminent upside and is more of a high risk hold.

Conclusion: Value Generation For Shareholders Is Tricky

There is no doubt that there is a market for Bridger Aerospace. Wildfires are becoming more intense and more globally spread which will increase wildfire prevention and suppression spending. However, the company has an uncertain growth phase ahead with a somewhat undesired preferred stock component and perhaps this is the way a company such as Bridger Aerospace could only raise capital, namely through a SPAC merger and raising capital through preferred share issuance.

As a result, I do like the company and its fire prevention and suppression services but I don’t quite like the company as an investment. However, Bridger Aerospace is definitely on my radar as I want to follow the company’s growth or perhaps lack thereof and assess quarter to quarter whether the investment case improves.