Bombardier Stock: Has Bombardier, Inc. Finally Bottomed?
This Is Good News for Bombardier Stock
In the past few weeks Bombardier, Inc. (TSE:BBD.B) has dropped to its lowest price level ever. Investors wondered if the Canadian government would support the “C Series” airliner. Fortunately, Bombardier reassured investors that the program would go ahead.
This is good news for holders of BBD.B stock. Had Bombardier scrapped the program, it would have killed Bombardier stock. After all, the company has spent billions of dollars and enormous effort in getting the C Series to market.
Aerospace stocks in the U.S. and Europe are down 16% year to date on average. (Source: “Opinion: Why Equity Investors Are Worried About The Aerospace Sector,” Aviation Week, February 18, 2016.) Bombardier has contributed its fair share to that dubious trend. BBD.B stock has lost some 40% this year alone and flirted with becoming a penny stock. Nevertheless, this is also why Bombardier is such an interesting stock. At less than $1.00 share, investors can get into one of the world’s leading aerospace manufacturers.
Investors worry that the current aerospace sales upcycle, now in its seventh year, will end soon. Slow growth in emerging markets has raised fears that the accountants may have to trim overflowing airliner order books. Indeed, many fear another global recession.
Of course, foreign exchange pressures aren’t helping a vulnerable scenario. (Source: Ibid.) Therefore, many investors worry the future of the aerospace industry may be more bearish than its recent past. However, Bombardier’s rosy future is just beginning.
While the Canadian company’s rivals were surging, it saw suffered delays and dismal sales. At the Paris Air Show, many airlines commented on the excellence of the C Series airliner—yet nobody pulled out their wallet, let alone cut a check. Luckily, that may be about to change.
The Bombardier C Series is a new 100–150 seat aircraft. Depending on the configuration, it boasts such innovations as a new kind of jet engine, combining the power of a jet with the quietness and fuel consumption of a turboprop.
Air Canada has finally ordered the C Series. This is important for two major reasons: 1) it was important for the market and the airlines to see that Canada’s main carrier showed confidence in the C Series and Bombardier; and 2) moreover, the order is the first for the C Series since 2014 and as such, it will help promote Bombardier’s new offerings, fueling a ripple effect on the international stage.
The C Series has now added a major North American airline to complete orders received in Europe and Asia. It is a turning point for the C Series. Air Canada has placed 45 firm orders, worth $3.8 billion, and options for the purchase of 30 additional aircraft.
As for rumors of Canadian federal government intervention, this may take a more investor-friendly approach. The Quebec government injected $1.0 billion in the C Series; however, Ottawa has not yet made a decision. While the Canadian government’s participation is welcome in supporting the new airliner, the aid could be delivered indirectly.
In Ottawa, the opposition parties have called on the government to take action. The Conservative party wants tax cuts, while the New Democratic party, on the opposite end of the political spectrum, urges direct financial assistance.
Bombardier expects revenue of $16.5–$17.5 billion for the year 2016 and announced an order book worth almost $60.0 billion.
Despite its problems, Bombardier remains a key anchor firm for Canada’s aerospace industry. This means that the federal government will not allow Bombardier to fail. Failure of Canada’s most important industrial group would carry major consequences for the Trudeau government.
One way the federal government could help Bombardier, avoiding taxpayer money or direct cash handouts, would be to allow the Toronto Island Airport to expand its runways. This would attract exactly the kind of traffic that the Bombardier C Series addresses; the move would stimulate sales of the aircraft in North America.
The C Series offers airlines significant cost savings. Air Canada expects savings of more than 15% per seat in fuel consumption compared to the airliners they’re planning to replace with the C Series. (Source: “Air Canada to Purchase Bombardier C Series as Part of its Fleet Renewal Program,” Air Canada, February 17, 2016.)
The airliner’s decreased fuel consumption has lifted the level of its traditional direct competition from Brazil’s Embraer to include Boeing and Airbus. While Bombardier has invested heavily in the C Series, featuring innovative Pratt & Whitney Canada “PW1000G” geared turbofan engines, Airbus’ “320neo,” a C Series competitor, features the same engines.
As for holders of BBD.B stock, Bombardier will also offer a share consolidation package to bring the share value upward to between $10.00 and $20.00. Of course, Bombardier shareholders and the Toronto Stock Exchange must approve this move. Management believes that this consolidation will attract investors.
In the early 2000s, Bombardier stock was valued in the $25.00 range, better reflecting the value of the company’s multinational activity in rail transport and aerospace. Bombardier stock lost some 67% of its value in 2015 because of financial challenges related to the C Series delays. Yet the C Series aircraft will enter service this year and Bombardier will start recovering cash flow as 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 100+-passenger twinjet segment.
The story isn’t over yet for Bombardier stock.
