When it comes to investing in aerospace, The Boeing Co. (NYSE:BA) is the first company that comes to mind. But for investors looking for more upside, Canadian rival Bombardier, Inc. (TSE:BBD.B) could be interesting.
We all know about the massive demand for commercial airplanes from the emerging markets, especially from China, Asia, and Latin America. While there’s currently a pause, given the stalling in China, this will not last forever. The growth in the Chinese market will be staggering in the decades ahead, as the Chinese middle glass grows.
The ruler of the skies on the production side continues to be Boeing. The company produces and sells the most planes and emphasizes innovation. With a market cap of nearly $100 billion and a payroll of more than 165,000 workers globally, Boeing dominates the market. Airbus is its main rival in what has been a back-and-forth battle for orders, but if I were to own only one stock in the aerospace sector, I’d lean to BA stock.
You may have heard about the delays in the launch of Boeing’s “787 Dreamliner,” so it was a surprise when the company announced last week that it was ahead of schedule in the launching of its smaller single-aisle “737 Max” jetliner, which is planned for the third quarter of 2017.
For Bombardier stockholders, Boeing’s recent news isn’t so great, as the Canadian jet maker continues to struggle to deliver on its planned launch of the new “CSeries.” Bombardier’s CSeries is a class of single-aisle planes that are over two years behind schedule and over budget by about $2.0 billion.
Having said that, Bombardier is not dead yet. Of course, it could be if the company continues to not execute on its plans. For the risk trader seeking a potentially rewarding trade, playing Bombardier could be worth a look, but be warned that the move entails massive risk.
The Comparatives: Boeing versus Bombardier
The launch of Boeing’s 737 Max will be troublesome for Bombardier down the line, as it operates in a similar space as the planned CSeries.
Boeing already has close to 3,000 orders for the 737 Max, which has a capacity of between 126 and 220 passengers, depending on the model and configuration.
In comparison, for the “CS100,” expected to be certified by the year-end, and the bigger “CS300,” expected sometime in 2016 (of course, you never know with Bombardier), the order log has been horrible, as the company has been trying to convince airlines to buy a new plane versus using established models from Boeing and Brazil-based Embraer. The CSeries has a capacity of 100 to 160, depending on the configuration.
At this time, the comparative numbers of planes ordered are dismal for Bombardier, but it’s not about the order log here; it’s about getting the CSeries in the sky.
At Bombardier’s Investor Day last week, CEO Alain Bellemare offered the market some optimism, saying the company will deliver between 255 and 315 CSeries planes by 2020. The issue is that the target was for 300 firm orders by 2016; this has not happened and the most recent order made was in September 2014, so investors are right to be skeptical of the company meeting its target.
The order book is dismal in comparison to Boeing, but Bombardier doesn’t need the same order count as its much larger competitor. It needs to get the plane in the sky and begin to execute more effectively. Bellemare has promised this will happen. Again, we’ll see when it happens.
Bombardier Could Return Huge Gains
I haven’t even talked about the major passenger train unit of Bombardier yet, which is also facing execution issues. This unit is valued at more than $4.5 billion, following a recent investment from pension fund manager Caisse de Depot et Placement du Quebec, which assumed a 30% stake in the rail business for $1.5 billion. The valuation is much more than the total $2.2 billion market value of Bombardier, which means the stock market is assigning zero value to the aerospace unit. Of course, Bombardier has massive debt.
Without saying another word, it’s not a question of which is the best company. That would be Boeing, hands down. But if you are talking about the rate of return, Bombardier may be the prime choice.
Consider the following: For Boeing to double, it will take years. Even a 25% move could be well over a year away. Compared with Bombardier, with a share price that’s already down 70% this year, it could easily rally 25% in a few days on good news. Bombardier stock could be an easy double in a month. Of course, that’s if the company can deliver positive news on its CSeries.