Investors Too Bearish on Bombardier Stock
Bombardier, Inc. (TSE:BBD.B) hit a year-to-date high this week. The airplane maker hinted that it does not need federal government funds to push its “C Series” airliner program to fruition. Bombardier stock has gained almost 18% over the past 30 days and the trend is decidedly bullish.
Ottawa’s aid is not essential, Bombardier says. Perhaps it’s a public relations strategy to ease the public and the Western Canadian provinces, to ease the acceptance of inevitable government support. Yet, the statement is powerful after the months of speculation about Bombardier’s ability to complete its most ambitious aerospace program yet. It, too, is an ambitious and bullish statement. It tells investors, customers, employees, and taxpayers that Bombardier is a strong and responsible company. And it certainly suggests that Bombardier stock should be priced much higher.
Indeed, at this point, when Bombardier does get federal funds—discussions with the Trudeau government are moving ahead—the aid will have the effect of a welcome bonus rather than essential life support. Bombardier’s aircraft program chief, Rob Dewar, assured the public 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.)
Of course, Bombardier is still hoping that Ottawa follows the Quebec provincial government’s decision to inject US$1.0 billion into the C Series program. Why not? Quebec’s financial support gave it a 49.5% stake in the C Series program. Bombardier also received US$1.5 billion from Quebec’s pension fund, the Caisse de dépôt et placement du Québec, in exchange for a 30% stake in the company’s train-making business. (Source: Ibid.)
Apart from giving the company a comfortable cushion to absorb various costs, prospective C Series buyers will be more confident about Bombardier’s ability to fulfill orders if it has the money to do so. Airplane makers are paid upon delivery, so they need sufficient capital to keep functioning and get the planes built. For some strange reasons, investors misinterpreted Dewar’s statement—bullish and public relations shrewdness—as some admission of difficulty. The stock lost some of its uplift today.
Moreover, if there is any doubt left about the competence of the C Series, Bombardier has completed a 30-flight test program in Europe with the “CS100” aircraft. Bombardier confirmed that the plane has met all performance targets, suggesting it is ready for entry into service with its launch customer next June. Clearly, the tests were also intended to draw attention to the plane from other European carriers who might be interested in the 100–150-seat aircraft.
Investors should stop hesitating about Bombardier stock. It’s time to bet on it while shares are cheap. The media has over-reported the construction delays of the company’s excellent C Series airliners, ignoring the technology, expertise, and engineering excellence from thousands of people that have gone into the new airliner. Such has been the pessimism that you’d think no aircraft company ever suffered a delay in delivering a technologically groundbreaking airplane to customers.
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.
Interest in the CS100 has grown considerably after certification and it should accelerate after the successful test program. The market has good prospects but Bombardier has not suggested any guidance on orders for beyond 2016. Perhaps that’s what’s missing from pushing Bombardier stock to a new “cruise” price? It should certainly be much higher than CA$1.30 to CA$1.45 per share.
RBC Capital Markets has an “Outperform” rating and a target of CA$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.)