(The following story by Scott Deveau appeared on the Financial Post website on September 26, 2009.)
OTTAWA — Bombardier Inc. has been on a roll. The Montreal plane and train maker has not only broken ground on its new CSeries facility this month, there are signs that the business-jet market and declines in commercial air traffic have stabilized in recent weeks. While its share price has reacted accordingly, analysts are split on whether now is the time to buy.
The recent run-up in the shares of Bombardier Inc. has been prefaced, in part, on a false assumption that the bottoming of the business-jet market means a recovery is imminent, which historically hasn’t been the case, according to Cameron Doerksen, an analyst at Versant Partners
Investors can’t be blamed for wanting to get in on the bottom. In recent years, the primary driver of Bombardier’s stock has been new business-jet orders. In fact, the last time Bombardier’s shares had a sustained rally above $5, it was kicked off by an impressive first-quarter tally for executive jet orders in May 2007, which was maintained until the business-jet market collapsed in the fall of 2008. Bombardier’s shares hit a peak of $8.90 in June 2008 before they spiralled.
Aircraft manufacturers, like Bombardier, have faced an unprecedented level of cancellations and deferrals this year and new jet orders have dried up. Not surprisingly, their shares have fallen accordingly. But Bombardier got a bit of a bounce earlier this month after stronger-than-expected earnings. It also broke ground on its new CSeries plant and early signs started to emerge that the business-jet market was stabilizing.
“We believe that the stock’s recent rally is inconsistent with the near-to-medium-term fundamentals for the company,” Mr. Doerksen said. “Given the still-challenging outlook for the aerospace industry, especially the business-jet market, we do not believe that the current share price strength is sustainable.”
He added that while it might be true that the business-jet market has bottomed, a full recovery will likely remain elusive until at least 2011, which should put pressure on the margins and the earnings of Bombardier’s aerospace division as it struggles with weaker prices and fewer deliveries.
Historically, a recovery in the business-jet market lags a recovery in corporate profitability and the broader economy by six to eight quarters, Mr. Doerksen said. It took four years for deliveries to fully recover after the last downturn in 2002 and 2003, so history would suggest that the current downturn for orders has not run its course, Mr. Doerksen said.
He said a more attractive entry point would be in the low $4-range, and maintained his $4.25 price target on Bombardier. He has a “sell” on it.
If Bombardier has proven anything during the economic downturn, it is that the company is in much better shape than it was during previous recessions, and that it should be a core holding for investors with a long-term view, says David Newman, analyst at National Bank Financial.
The Montreal manufacturer’s leadership position in both the aircraft and rail segments in which it competes, and its renewed focus on leaner operations and higher-margin business, has it better positioned this time around. In addition, management has demonstrated that it is nimble enough to traverse through the downturn in the aerospace cycle, turning in a stronger-than-expected quarterly result earlier this month, all the while maintaining a strong balance sheet –$2.8-billion in free cash and a backlog worth $45.7-billion.
“They are a large global company that seems to be able to withstand downturns,” Mr. Newman said. “Longer term, I really think it’s the hidden gem.”
Bombardier’s share price hovered between $2 and $9 in the aftermath of 9/11. But Mr. Newman said he expects that valuation gap to narrow based on the company’s continued resilience and its diversified portfolio. “The transportation side, which we all seem to forget about and is half their business, is doing quite well.”
While Mr. Newman wouldn’t put a figure on it, other analysts have estimated Bombardier’s train business is worth $3 a share alone. Moreover, recent signs that the business-jet and commercial aviation businesses have bottomed provides hope that a recovery in the Aerospace division is nearing. An order from AMR Corp., the parent company of American Airlines, for 22 Bombardier regional jets earlier this month should help the manufacturer stave off production cuts next year.
While the next few quarters may indeed prove challenging, Mr. Newman said Bombardier is well poised to benefit from a recovery and for the long run.
“This time around, they’ve proven their mettle by doing all the things they said they would,” he said. “It’s a core holding, and it’s not unlike a company like [Canadian National Railway Co.] that are just solid all-around companies, well-managed, with good balance sheets and generate strong free cash flows.”
He has an “outperform” rating on the stock and a $5.50 target.