Bombardier Stock Is on Cruise Control
Bombardier, Inc. (TSE:BBD.B) was flat on the Toronto Stock Exchange and Bombardier stock hovered around the high $1.20s per share during the week ending on April 8, as the topic of federal government aid lingers.
Prime Minister Trudeau has hinted that the aid is forthcoming, but his government is not rushing. There are hurdles to the aid. One is Western Canada, suffering from the collapse of its largely oil-based economy. The other is how the United States might react to the potential aid package.
Bombardier technically competes against Boeing in the short- to medium-range 100–150 passenger airliner market. Even while Canada could suggest that U.S. military contracts to Boeing are a form of subsidy, the Americans would demand certain assurances about how the aid could represent a trade barrier.
Washington also questions the nearly $1.5 billion of government aid to support the “C Series.” The amount includes Quebec’s announced $1.0-billion equity stake in a newly created joint venture with Bombardier. (Source: “U.S. sees planned bailout for Bombardier as trade barrier,” The Globe and Mail, April 7, 2016.)
But that’s not all.
Washington also worries about government-backed loans and financing, essentially incentives, offered to potential buyers of the 110–150-seat commercial airliner, which is slated to go into service next June. (Source: Ibid.) It is more than nostalgic to note that in the early 2000s, Bombardier stock, valued in the $25.00 range, far better reflected the company’s multinational activity in rail transport and aerospace.
It’s All About the C Series
Bombardier has invested its commercial aerospace future in the C Series single-aisle 100–160-passenger airliner class. The Bombardier C Series is a new 100–150 seat aircraft, depending on the configuration, featuring such innovations as a new kind of jet engine, combining the power of a jet with the quietness and fuel consumption of a turboprop. The C Series features an innovative Pratt & Whitney Canada “PW1000G” geared turbofan engine, the very same chosen by Airbus for the “320neo,” a C Series competitor. This has lifted the level of its traditional direct competition from Brazil’s Embraer to include Boeing and Airbus.
Bombardier stock has suffered over the past few months because of production problems with the C Series. Bombardier stock lost some 67% of its value in 2015 because of financial challenges related to the C Series delays. Nevertheless, the company has already started the ramp-up to full production after completing the first “CS100,” scheduled for delivery in 2Q 2016 to Swiss Airlines, owned by Lufthansa. The C Series aircraft will enter service this year and Bombardier will start recovering cash flow because airlines pay on delivery.
The C Series has 243 firm orders for the aircraft, which is a contender to smash the duopoly between Boeing and Airbus in the over 100-passenger twinjet segment. Bombardier stock had a psychological drop after it failed to get an order from Southwest Airlines. By acquiring a Bombardier aircraft, Southwest would have had to break one of the cardinal rules of its successful model: relying on a single type of aircraft to contain maintenance and flight training costs.
Potential Upsides? Iran
Bombardier may be able to avoid the entire issue of Canadian federal government aid. Iran’s Qeshm free zone wants to create a new airline and equip it with Bombardier airliners. (Source: “Iran Is Interested To Create A New Carrier With Bombardier Aircraft,” Appnews, April 7, 2016.) Discussions between Bombardier and the free zone, which will finance the purchase of the aircraft, are at a rather advanced stage, according to a source familiar with the matter. Bombardier representatives have also visited Iran in recent months.
The fact that the Iranian government will own the future Iranian company makes things easier for Bombardier. The government of Iran runs and “owns” the Qeshm free zone. This means the airlines would have the financial and regulatory support of the Iranian government. In early February, Canada eased sanctions against Iran. Bombardier can theoretically sell aircraft to Iran, but must ask for permission from the governments in Canada and the United States before exporting one.
Ultimately, Ottawa’s aid is not essential, Bombardier says. The aircraft program chief of the C Series, Rob Dewar, said that Bombardier has everything it needs to increase production of the C Series and other aeronautical activities. (Source: “Federal funding ‘helpful but not required,’ Bombardier Inc executive says,” The Financial Post, March 23, 2016.)
And if there is any doubt left about the competence of the C Series, note that Bombardier has completed its 30-flight test program in Europe of the CS100 aircraft. Bombardier confirmed that the CS100 has met every last one of its performance targets and that the aircraft is ready for its service debut with Bombardier’s launch customer next June. The successful tests will also draw attention to the plane from other European carriers who may be interested in the 100–150-seat aircraft.
Investors may want to stop hesitating about Bombardier stock. It could be time to bet on the company while shares are cheap. The media has been so focused on the production delays for the advanced C Series airliners that it has overlooked the stellar technology, expertise, and engineering skills that have gone into the aircraft. In fact, the pessimism has been so prevalent that it seems like no aircraft company has suffered a delay in delivering a groundbreaking airplane to customers in the history of aircraft.
RBC Capital Markets has an “Outperform” rating and a target of $2.00 per share on Bombardier stock. Frankly, even that target seems too low. Bombardier is not a risky Internet or mobile stock, nor is it a cheap restaurant chain. It is a top aerospace company with all the scientific, technological, and manufacturing skill that requires. (Source: “Are Analysts Bullish Bombardier, Inc. (TSE:BBD.B) After Last Week?,” Franklin Independent, March 23, 2016.)