(The following article by Bertrand Marotte was published by the Globe and Mail on August 25.)
MONTREAL — Investors will be looking for reassuring signs of recovery at Bombardier Inc. when the plane and train maker unveils its second-quarter financial results on Wednesday.
So far, the Street is generally pleased with the efforts of new president and chief executive officer Paul Tellier to turn around the troubled industrial giant.
The sweeping corporate restructuring he initiated earlier this year is well under way, with such measures as a new equity issue, a balance sheet cleanup, the divestiture of non-core assets and the pending sale of the recreational products division, as well as the downsizing of the problematic Bombardier Capital financing unit.
But concerns remain over prospects for the Montreal-based company’s once-high-flying aerospace segment, and over the outlook for Bombardier’s other major business — rail equipment.
Analyst Ihor Danyliuk of Merrill Lynch Canada Inc. said in a recent research note that he expects profit per share of 5 cents for the second quarter, compared with 12 cents a year earlier and in line with the Street’s consensus estimate.
“We believe that the market would not have a strong reaction one way or another to a [second-quarter share profit] range of 4 to 6 cents,” Mr. Danyliuk said.
”As a result of the new management team and growth strategy, our view is the market’s focus on earnings is more oriented on the outlook for [next year] and beyond as opposed” to 2003.
The big job for Mr. Tellier and his team is “to ‘right-size’ Aerospace in order to raise [its] margins to 4 per cent to 5 per cent from current break-even levels. Every 1-per-cent increase in Aerospace margins increases [earnings per share] by 4 cents,” Mr. Danyliuk said.
Part of Mr. Tellier’s strategy at Bombardier is to boost rail operations — known as Bombardier Transportation — in order to offset the aerospace side, which produces a line of regional jets as well as a family of corporate planes, and whose growth is expected to level off.
Transportation is expected to generate 50 per cent of revenue and 65 per cent of pretax profit this year, while aerospace will account for 48 per cent of sales and 28 per cent of pretax profit, according to Jacques Kavafian of Octagon Capital Corp. of Toronto.
“This is in sharp contrast to three years ago when in fiscal 2001, the aerospace division generated 66 per cent of revenues and 87 per cent of pretax profits. The reversal is due to the acquisition of Adtranz (a manufacturer of trains) in Germany in 2001, thereby growing the transportation segment, while the aerospace segment was weakening.”
However, growth of the lower-margin transportation operations could slow down considerably over the next few years, warns Robert Fay of Canaccord Capital Corp. The level of new orders for passenger rail cars in Britain, a major market for Bombardier, is expected to decline in years to come, Mr. Fay said in a recent report.
Britain is “a major customer for Bombardier Transportation and a fall in orders from that country could have a significant impact on the company’s earnings.”
He adds that North America, Bombardier’s other important market, also appears to present a soft outlook.
Late last week, Bombardier lost out to rival Siemens AG of Germany on a key contract, valued at about £200-million ($444-million), to build 168 rail coaches for a consortium headed by FirstGroup PLC.
A Bombardier spokesman was quoted in The Times of London on Friday as saying: “We are bitterly disappointed to have not been named as preferred bidder. The contract was of vital importance to Bombardier and clearly there will be implications for our industrial footprint in the U.K. It is now obvious that companies do not have to be based in the U.K. to win U.K. orders.”
Mr. Fay said in his report that Bombardier was at a disadvantage from the start because FirstGroup already operated trains built by Siemens and French rival Alstom SA. Not helping matters was the fact that Bombardier backed a rival’s bid against FirstGroup, he added.
Now, Bombardier faces a yawning gap in its production schedule at key facilities in Derby between the years 2004 and 2008, when work gets started on a major order for the London Underground, Mr. Fay said.