Bombardier: Risky Sector, Undervalued Company

Being a member of the S&P/TSX 60 Index gets you a lot of attention. Other than the fact that it means your company ranks among Canada’s largest in terms of market capitalization, fund managers and other indexers have to buy your stock. It also means you are likely better-known by the broader public as a result of the increased presence things like television commercials provide.

So far in 2008, it has also meant an outperformance versus the broader S&P/TSX composite index, which is down around 38% – albeit just slightly. Naturally, some names have done better and some have done worse.

One of the stocks that has outperformed both Canada’s benchmark index and the TSX 60 is Bombardier Inc. (BDRAF.PK), although it is still down 30% year-to-date. It is one of nine companies in the S&P/TSX composite index with a price-to-earnings ratio under ten, a dividend yield above 2% and earnings momentum above 50%, according to FPinfomart data. However, the other eight are energy companies.

Bombardier, which reports fiscal third quarter results for 2009 before the market opens on December 4, has been dragged down by a pessimistic outlook for business jet deliveries and pricing. Like its rivals in the aerospace sector, the economic downturn threatens both medium and long-term results.

But at recent levels with the stock trading at just 5.6 times on a price-to-earnings basis and 3x on EV/EBITDAR, its valuation looks very cheap, said BMO Capital Markets analyst Claude Proulx.

He expects Bombardier’s quarterly earnings to be strong, but told clients that investors will likely concentrate their attention on the company’s production and delivery guidance, feedback from management on the business jet backlog, and aerospace margin guidance.

The more pessimistic outlook on business jet deliveries and pricing prompted Mr. Proulx to cut his fiscal 2010 earnings per share estimate to C40.58 from C$0.65, while he introduced a 2011 estimate of C$0.53. However, his price target of C$9 represents upside of roughly 110%.