Bombardier Stock: This Is Why Canada Should Bail Out Bombardier, Inc.

Taxpayers Need to Help BombardierBombardier, Inc. (TSE:BBD.B) has received a firm order for 20 “Challenger 350” business jets for a total contract value of $534 million. Bombardier stock gained over two percent on the news. (Source: “BRIEF-Bombardier Secures Firm Order for 20 Bombardier Challenger 350 Aircraft,” Reuters, April 1, 2016.)

Much of the attention on Bombardier has focused on the “C Series” airliners, where the company has staked its future. This may have allowed some Bombardier investors to forget that Bombardier is perhaps the biggest business jet maker in the world.

In the recent contract that pushed Bombardier stock up, the client’s identity was not disclosed, as is often the case in the business jet sector. Last November, the U.S. firm Flexjet, which is a kind of timeshare for private aircraft, signed a “Memorandum of Understanding” for the purchase of 20 Challenger 350 planes. (The Challenger 350 is a medium-sized business jet that can carry up to eight passengers over a distance of nearly 4,500 miles.) Friday’s announcement is perhaps the formalization of this agreement.

Meanwhile, the issue of Canadian government aid for Bombardier has not materialized yet. This is holding Bombardier stock from heading higher. The confirmation of aid will reassure shareholders and airlines alike that Bombardier will be able to overcome the delays and maintain a sustained delivery pace for the C Series.

If there are any investors still shocked by the prospect of government aid, know that Bombardier is by no means unique. Now, as this is being written and as you are reading, large industrial groups anywhere in the world are getting huge financial aid packages from governments or other outsiders. In the case of Bombardier, the Quebec government has delivered an investment of $1.0 billion (CA$1.3 billion) for a 49.5% stake in the C Series aircraft program. In return, the government received 200 million exchangeable Bombardier shares at a price of $2.21 per share in five years.

Remember that Bombardier employs 17,000 people in Quebec and 65,000 worldwide, not to mention the thousands of subcontractors who depend on Bombardier. These are jobs the government is invested in preserving.

Bombardier is simply one of those companies, like General Motors or Boeing, which have become too big to fail. It accounts for some two percent of Quebec’s gross domestic product alone. Those who believe that Bombardier aid is expensive have not considered what not helping it would cost.

As an example, the German government has stepped in to help the automotive giant Volkswagen confront the bad financial situation resulting from the company’s own wrongdoing. Volkswagen, which employs more than 250,000 workers in Germany, would end up costing the German government much more as a failure than as a productive entity. VW may have to pay about $70.0 billion in legal fees and fines to deal with “Dieselgate.”

Airbus had problems getting the now rather successful “A380” into assembly and it is worried about the “A400M” military aircraft that has cost some $7.0 billion more to develop than imagined. The French government helped out.

There are dozens of other examples where governments have had to induce lift into major industrial groups to prevent them from crashing.

The bottom line for Bombardier investors is that the stock at its current $1.25 to $1.30 range is a bargain, considering the potential price when the company makes its first C Series delivery in June. The fact that Bombardier said that could achieve this milestone without federal government funds is an even greater call for confidence in Bombardier stock’s recovery. (Source: “Federal funding ‘helpful but not required,’ Bombardier Inc executive says,” The Financial Post, March 23, 2016.)

RBC Capital Markets has an “Outperform” rating and a target of $2.00 per share on Bombardier stock. Frankly, even that is too low. Bombardier is not some fly by night Internet or mobile service company; it’s not a cheap food restaurant chain either. It is one of the world’s top aerospace companies with all the scientific, technological, and manufacturing skill that implies. (Source: “Are Analysts Bullish Bombardier, Inc. (TSE:BBD.B) After Last Week?Franklin Independent, March 23, 2016.)

Bombardier, despite the rumors, is actually beating the headwinds with the C Series’ production. Bombardier is targeting a production of 15 to 20 planes in 2015 and 30 to 35 in 2016. Moreover, Canadian aviation authorities have certified the “CS100.” Certification is an important sales incentive.