Bombardier Stock Is Trading at Six-Month Low, but it Should Not Be
Bombardier, Inc. (TSE:BBD.B) is trading at a ludicrous price. The market has simply got it wrong on Bombardier stock, which dropped to a six-month low on news of delays affecting the “CSeries” airliner delivery schedule.
Some investors—namely those who missed the rally of the past few months—might be considering getting into Bombardier stock now that it’s so low. If you are among this bullish bunch, there’s a good argument in favor of Bombardier, which, at the very least, deserves your consideration.
Bombardier stock was showing a nice recovery in 2016. Indeed, it has performed better than many expected, given the fears that the next destination for the Montreal, Canada-based maker of trains’ was bankruptcy city. Instead, the company responded by not only fixing the CSeries airliner’s production problems, but by delivering the first units to launch customer Swiss International Air Lines AG. That airline has been operating the CSeries since last July.
Any Hint of Delay Can Hurt Bombardier—Unfairly
But Bombardier investors have been spooked by the prospect of further delays. Unlike the setbacks that hampered the CSeries’ certification, look beyond Bombardier to find the cause of the latest delays. Pratt & Whitney Canada, no less than one of the pioneers of aviation, is responsible for making the super-efficient engine. And if someone can show me a company delivering any plane on schedule in the past decade, I have some swamp land in Florida for sale.
Pratt & Whitney says it’s close to resolving the problem. The engines for the CSeries are advanced to the point that they require new special alloys. The delays affect a number of other plane companies, including Airbus and Mitsubishi. Recently, Pratt & Whitney said it has found a solution. The aircraft engine-maker said it has found a solution, and that it would be back on track by next year.
For its part, Bombardier will now deliver seven, rather than 15, planes by the end of this year. In revenue terms, that means Bombardier will perform at the bottom of its revenue guidance: $16.5 billion-$17.5 billion. Investors were also concerned by potential delays—nothing official was stated on the matter—in the company’s business plane schedule, again because of a supplier, and this time it concerns a wing for the new “Global 7000” jet.
This newest variant of the “Global” family is due to market in late 2018. Bombardier has said nothing that would suggest it will have to postpone that date. Analysts have cited wing problems, but these were well known. Still, the Global plane family is one of Bombardier’s most profitable products. (Source: “Bombardier Declines on Outlook for C Series and Business Jets,” Bloomberg, September 20, 2016.)
Bombardier’s Problems Are Typical in the Aerospace Industry
So, there are problems. They are neither outrageous nor extraordinary in the aerospace business. But investors are ignoring some other bullish factors. For starters, the Canadian Parliament—the executive equivalent of Congress—has returned from its summer break. Where Bombardier is concerned, there is pressure to act on the potential $1.0 billion-or-more investment from the Canadian federal government to help with the CSeries production.
Indeed, while clearly there is less urgency to act, the time has come for the Canadian government to state clearly whether it will invest in the Bombardier CSeries. The speculation on this issue (will it?/won’t it?) is weighing down on BBD.B stock. It’s like being one of two finalists for the last rose on “The Bachelor” TV show when the producers suddenly delay the last episode.
The provincial authorities in Quebec, where Bombardier has its headquarters, have urged Ottawa to take a clear stance on Bombardier one way or the other. The Quebec provincial government’s own $1.0 billion investment no doubt helped “stabilize” the CSeries program. It also helped Bombardier win major orders with Air Canada (TSE:AC) and Delta Air Lines, Inc. (NYSE:DAL). (Source: “Time for Ottawa to make up mind over Bombardier Inc financial aid, Quebec finance minister says,” Financial Post, September 13, 2016.)
A visit from China’s Premier Li Keqiang to the Canadian capital further suggests that investors can expect some favorable news on the subject of federal investment. The visit could be bullish for Bombardier jet sales in China, which has the fastest-growing demand for air transport services in the world. But there’s more: China wanted to buy Bombardier’s entire railway division in 2015. (Source: “Trudeau welcomes Chinese Premier Li Keqiang warmly but cautiously,” CBC, September 21, 2016.)
So, amid concerns of giving away too much Canadian technology to foreign interests, the government will be prompted to act; if not now, then before the end of this year. Government aid will be the final piece of the BBD.B stock puzzle, reducing risk in the opinion of most investors. As for me, I see some predictable ramp-up pain with a bullish 2017 for Bombardier.