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Summary

  • Bombardier is cheap at the moment with a P/E of 11.
  • The Russian-Ukrainian situation offers opportunities.
  • Bombardier should also focus on the strong points of its aircraft and use these to increase revenue.
  • Exiting or partnering of the CSeries airliner would be good for profitability.

Bombardier (OTCQX:BDRBF) is better of when it stops developing the new CSeries airliner because of the huge competition. Instead Bombardier should leverage the strong points of the aircraft it produces. Bombardier's aircraft strong points and the crisis between Ukraine and Russia provide opportunities. Bombardier is cheap now and has a lot of growth potential when the cards are played right.

Fundamentals

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 Global Express and 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.

Corporate

2013

2012

2011

2010

2009

Revenue

$18,151

$16,768

$18,347

$17,892

$19,721

Net income

$572

$598

$837

$775

$1,026

EBIT

$923

$695

$1,202

$1,205

$1,291

EBIT%

5.09%

4.14%

6.55%

6.73%

6.55%

EPS

$0.31

$0.25

$0.47

$0.39

$0.56

Dividend

$0.09

$0.09

$0.09

$0.09

$0.07

Dividend Yield

2.53%

P/E

11.58

Aerospace [BA]

Aerospace still suffers from the development of the CSeries commercial airliner. Revenue has increased, but EBIT is still (slightly) declining.

Aerospace

2013

2012

2011

2010

2009

Revenue

$9,385

$8,628

$8,594

$9,357

$9,965

EBIT

$422

$405

$502

$473

$896

EBIT%

4.50%

4.69%

5.84%

5.06%

8.99%

Transport [BT]

Transport

2013

2012

2011

2010

2009

Revenue

$8,766

$8,140

$9,753

$10,009

$9,756

EBIT

$508

$290

$700

$625

$533

EBIT%

5.80%

3.56%

7.18%

6.24%

5.46%

Competition for the CSeries Airliner

Commercial airliner manufacturing is a tough business which reduced the number of companies able to develop airliners independently dramatically compared to a few decades ago.

The 150+ passenger segment is dominated by Boeing (NYSE:BA) and Airbus (OTCPK:EADSF). This is described in more detail in The Battle For Leadership In The Aerospace Industry.

Development of the new CSeries commercial aircraft is a long and costly process for Bombardier with a number of setbacks.

Embraer (NYSE:ERJ) is Bombardier's most important competitor for now. More details and a comparison between Bombardier and Embraer is done in The Battle For Bronze.

Japan, Russia, and China are also developing jet airliners in the same 100-150 passenger category as the Cseries airliner. Bombardier is probably better off when the CSeries project is exited gracefully or when the risk and costs of development and production are shared (for example by starting a joint venture with China)

Opportunities

Special Mission Aircraft

Bombardier uses an open architecture which allows easy integration of third-party equipment and new applications.

The open architecture and long range (of especially the Global series) make Bombardier airframes attractive for other aerospace manufacturers. For example the following special mission aircraft are built using Bombardier airframes:

Because of their endurance, Bombardier aircraft also take part in the search for Malaysian Airlines MH370.

Bombardier would be better off when it concentrates on the open architecture and long-range of many of its aircraft. These make their aircraft attractive for special mission aircraft. The examples above already show that a lot of major aerospace manufacturers see potential.

Russia

Russia (and the CIS, commonwealth independent states) only provide 7% of Bombardier's current revenue. The current crisis between Russia and Ukraine provides an opportunity for Bombardier.

Bombardier is in the process of starting a Joint Venture with Russian Rostec to produce Q400 turboprop airliners in Russia. This deal has a value of $3.4B and assembly was expected to start in 2014. In early March Bombardier said it was close to finalizing the deal.

In the former Soviet Union the aerospace industry was in different parts of the country. After the disintegration of the Soviet Union a very important factory became part of the Ukraine: Antonov.

Antonov manufactures as wide range of fixed-wing aircraft. Key in the importance of Bombardier are the twin-engined propeller driven Antonov 24/26/30/32 series, which are capable of operating from unprepared runways. Maintenance of older types and production of the An-32 is done in Kiev in the Ukraine.

Obviously the Ukraine will not provide spare parts or do maintenance on Russian Antonov aircraft. This leaves a huge gap in the air transport requirements of Russia. Russia is a huge country and permafrost make permanent hardened runways difficult and expensive to build and maintain.

Russia needs an Antonov-like aircraft and Bombardier is the only manufacturer in the world that can provide aircraft with similar capabilities. Bombardier has acquired De Haviland Canada which has a huge experience in developing and producing STOL (Short Take-Off and Landing) aircraft such as the Beaver, Twin-Otter, Caribou and the Dash 8, which has evolved in the Q-series aircraft of Bombardier.

According to the Moscow Times Russian Deputy Prime Minister Rogozin doubts that Russia could benefit and needed to produce its own. This is rhetoric and not very realistic. No country is able to produce a new aircraft from scratch at short notice.

Bombardier is Russia's only option to become independent of Ukraine's Antonov. Considering the size of Russia and the Antonov fleet which have to be replaced, the current Q400 deal would only be the start.

Conclusion

Unique strong points that are available in Bombardier aircraft are:

  • Long range;
  • Short Take Off Landing capabilities;
  • Open architecture.

By concentrating on these strong points Bombardier should be able to grow revenue by targeting niche markets with it.

Profit should also grow, especially when China and Russia are involved in Joint Ventures for producing the Q400 (Russia) and possibly co-producing the CSeries with China.

Exiting or co-producing the Cseries airliner should also stop the bleeding of the EBIT of the Aerospace division.

At a P/E of 11 Bombardier is cheap now. This, the growth potential and a dividend yield of 1.5% makes Bombardier attractive for a limited speculative position for the long term.

Source: How Bombardier Could Benefit From Russia-Ukraine And Should Also Change Its Strategy