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Bombardier (OTCQX:BDRBF) and Embraer (ERJ) are in a permanent struggle to be the third commercial aircraft producer in the world after Boeing (BA) and Airbus (OTCPK:EADSF). The gold and silver were compared in Boeing And Airbus: The Battle For Leadership In The Aerospace Industry. Now it is time to look at bronze.

THE CORPORATE FUNDAMENTALS

Financial Data Sources

All financial data is from reports published by Bombardier and Embraer. Remarks about the (financial) data published:

  • As of FY 2011 Bombardier changed the financial year-end from January 31 to December 31 to comply with International Financial Reporting Standards;
  • Although reporting is in USD, sometimes local currencies were given. Exchange rates used are 1 Brazilian Real - 0.42 USD and 1 Canadian Dollar - 0.91 USD;
  • Not all data presented by either company was clear. Sometimes it could be interpreted in several ways, sometimes it was contradictory and sometimes even outright wrong. The most likely data was used or not used when there were doubts about the reliability.
Bombardier20122011201020092008
Revenue$16,768$18,347$17,892$19,721$17,506
Net income$598$837$775$1,026$325
Dividend$0.091$0.091$0.091$0.073$0.000
Dividend Yield2.22%
EBIT$695$1,202$1,205$1,291$447
EBIT%4.14%6.55%6.73%6.55%2.55%
ROA2.32%3.51%3.64%4.82%1.47%
ROCE5.18%10.09%8.70%8.98%2.93%
FCF-$792-$1,257-$215$342$2,000
PE (Price/Earnings)16.40

(x1m with the exception of Dividend and PE)

Bombardier Inc is a Canadian company with 2 divisions: Aerospace and Transportation. Transportation primarily builds trains and Aerospace has 4 divisions:

  • Business: business jets such as the Learjet;
  • Commercial: commercial airliners with up to 150 passengers;
  • Amphibious: amphibious aircraft to battle wildfire;
  • Specialized: aircraft usually based on commercial airframes with special equipment to perform special missions, often for air forces or governments.
Embraer20122011201020092008
Revenue$6,178$5,803$5,364$5,498$6,335
Net income$349$120$345$479$396
Dividend$0.088$0.130$0.164$0.182$0.000
Dividend Yield0.27%
EBIT$614$248$408$321$437
EBIT%9.94%4.27%7.61%5.84%6.90%
ROA3.68%1.36%4.12%5.39%4.58%
ROCE9.18%4.12%6.80%5.23%8.58%
FCF (Free Cash Flow)$367$146$724-$181$147
PE (Price/Earnings)67.67

(x1m with the exception of Dividend and PE)

Embraer is a Brazilian company with 4 divisions:

  • Commercial Aviation; airliners with up to 122 passengers;
  • Executive Jets: business jets;
  • Defense and Security;
  • Neiva; agricultural aircraft for crop dusting.

(click to enlarge)

(click to enlarge)

Neither company will become a threat to the current commercial giants Airbus and Boeing as the chart shows.

At first glance, neither company is a good investment:

  • The profitability of Bombardier is declining;
  • Bombardier has a negative free cash flow for several years now;
  • Embraer is more profitable, but it varies over the years without a clear trend;
  • Embraer stock is very expensive considering the results;
  • Neither shows much growth and revenue stays the same or is slightly declining;
  • Indicators are volatile and change yearly without a clear trend.

PRODUCT LINES

Both companies have a Business Jet division and a Commercial Airliner division. Unfortunately these are not segmented in the financial reporting, but a rudimentary comparison can be made in aircraft delivered and the backlog.

Bombardier20122011201020092008
Revenue$8,628$8,594$9,357$9,965$9,713
EBIT$405$502$473$896$563
EBIT%4.69%5.84%5.06%8.99%5.80%

(x1m)

Embraer20122011201020092008
Revenue$6,178$5,803$5,364$5,498$6,335
EBIT$614$248$408$321$437
EBIT%9.94%4.27%7.61%5.84%6.90%

(x1m)

(click to enlarge)

Bombardier has more revenue, but Embraer is gaining on them. Embraer has a higher EBIT%, but the results are not constant.

Only the backlog and firm orders were used for the order book. No Memorandum of Understanding, letters of intent and options were included.

(click to enlarge)

Ultimately the actual deliveries are the most important. By splitting the deliveries into business jets and commercial aircraft, these product lines can also be compared.

(click to enlarge)

  • Bombardier is on the winning hand for business aircraft. Embraer started this in the beginning of this century, but their deliveries are leveling off and even decreasing;
  • Commercial aircraft production is dramatic for Bombardier and is decreasing on a yearly basis. Embraer also had a decrease last year;
  • Embraer is more successful with the smaller aircraft, while Bombardier has a (slightly) better order book with the larger aircraft. The new CSeries airliner is Bombardier's hope for the future and it has invested heavily in it;
  • Important clients do the same strategic rotating (of orders) as with Airbus and Boeing: for example American Airlines ordered 30 aircraft with Bombardier and 60 aircraft with Embraer.

FUTURE PROSPECTS

The future for Bombardier Commercial looks bleak; the success of the new CSeries aircraft is essential for its market share in commercial aircraft.

Bombardier's other aerospace divisions have adequate market shares or are niche leaders, but it is not likely, that they will show a lot of growth the coming years. This makes Bombardier a risky investment as the downside is bigger than the upside.

But there may be light at the end of the tunnel.

On November 22, 2013 Bombardier announced the start of aircraft maintenance services in Mainland China at Tianjin Airport Economic Area. The first step towards a joint venture and possibly a future Bombardier production facility in China (probably with the Aviation Industry Corporation of China)

Shortly after this statement an order of 16 CRJ600 jets was announced on December 2 and on December 5 a letter of intent for 30 Q400 turboprop aircraft was made public. Bombardier has serious problems and China might lend a hand.

"As the sole aircraft manufacturer with three distinct and optimized families of aircraft in the regional and single-aisle market segments of up to 149 seats, Bombardier is pleased to support China's five-year plan that calls for the expansion of regional airlines," said Mike Arcamone, President, Bombardier Commercial Aircraft. The reference to the five-year plan might be significant.

China is also a large - and growing - market for business jets, where Bombardier traditionally is strong.

Embraer is also present in China and produces - or rather assembles - the ERJ145 aircraft with a local partner since 2003, but Chinese airlines are strikingly absent in order book or deliveries.

In the rest of the world Embraer will probably continue to grow modestly in the Commercial aircraft division. Embraer seems to be favorite among US and European airlines, but they will also give orders to Bombardier.

INVESTING

(click to enlarge)

Neither company is very attractive to invest in at the moment:

  • Embraer is a good company, but very expensive considering the profit it makes;
  • Bombardier has serious issues with the Commercial division, but the other divisions are healthy.

A speculative long position Bombardier may be lucrative if:

  • the new CSeries aircraft becomes a success
  • or if China will come to the rescue
  • or if Bombardier is acquired by another aerospace manufacturer when the problems with profitability are not solved.

The Bombardier stock has a lot of upward potential if their problems are solved. The stock is currently priced far below industry average; a return to average would certainly be possible and depending on the news Bombardier could even get a 50-80% increase.

Price USDStockUpside
Current Price$4.100%
Industry Average$5.0022%
Industry High$7.5083%
Embraer high$16.75309%

(Stock price in USD. Exchange rate with Canadian Dollar 0.91)

Source: Bombardier And Embraer: The Battle For Bronze With 20% Upside