Bombardier (BDRBF.PK) is a Canadian train and airplane manufacturer, which trades under the symbols BBD.A and BBD.B on the Toronto Stock Exchange. According to its most recent annual report for the fiscal year ended January 31, 2011, and an investor fact sheet provided by the company, Bombardier is the third largest civil airplane manufacturer in the world.
The report also stated that Bombardier holds the number one position in business and regional aircraft. Further Bombardier stated that it is also the world leader in rail technology, a claim it supports with the fact that it holds the number one position in nine out of the eleven rails segments in which it operates.
The company reports its results in U.S. dollars, and reports income for two units: Aerospace and Transportation, the latter of which consists of its rail operations. At the end of the third quarter ended October 31, 2011, the company reported revenues at Bombardier Aerospace to be $2.3 billion, and at Bombardier Transportation revenues were also $2.3 billion. So the revenues between the two units each represented about 50% of the company's total revenues.
Earnings before interest and taxes were 7.4% of revenues for the transportation division, and 5.6% of revenues at the aerospace division. The transportation division had an order backlog of $33 billion, compared to $22.3 billion at the aerospace division. Combined, this means that at the end of the last reported quarter, the company had a $55.3 billion backlog. To put this in perspective, this is equivalent to approximately three years of revenues, according to the most recent annual report. The company also reported a cash position of $2.7 billion at the end of the quarter.
I've compared Bombardier to some of its airplane-manufacturing competitors in the chart below. Specifically, I compared it to American companies Boeing (BA), General Dynamics (GD), and Textron (TXT); Brazil's Embraer (ERJ) and The European Aeronautics and Space Company (EADSY.PK), which has its headquarters in the Netherlands and trades under the symbol EAD on Euronext Paris.
Bloomberg is the source of all but one of the numbers in the first three data columns of the chart, which were obtained following the close of markets on February 15, 2012. The trailing P/E of Embraer was not available on Bloomberg, so I used Yahoo Finance for that statistic, after the close of markets on February 15. While financial web sites are a good starting point for screening stocks, it is always a good idea to confirm the numbers based on financial information released by the company. Please note that as I am looking at general information for Bombardier's competition, I have not confirmed the accuracy of the financial sites' numbers. I gleaned the estimated information for the fourth column from financial reports for differing time periods released by the companies to get a general idea of the importance of commercial and business aircraft to each company's revenues, since this is the segment in which these companies compete with Bombardier.
Aviation (see below)
European Aeronautics and Space Company (EADS)
Less than 18.3% (see below)
Here is how I estimated the values in the last column of the chart:
- For the fiscal year ended December 31, 2011, Boeing reported that out of $68.7 billion in revenues, $36.2 billion (52.7%) came from commercial airplanes. $32.0 billion (46.6%) of its revenues came from the segment "Defense, Space, & Security".
- Embraer's most recent results are for its first nine months of fiscal 2011, which were released in its 3rd Quarter 2011 report. The report indicates the following breakdown for its main segments in U.S. dollars: Commercial Aviation was 69.8% of revenues, Executive Aviation was 13.5%, and Defense & Security was 14.8%. The sum of commercial and executive aviation was 83.3% of revenues.
- EADS reported for the period of the nine months ended September 30, 2011, in a release that can be found here, that out of 32.7 billion Euros of revenue, 21.1 billion (64.5%) came from Airbus Commercial, while the remainder came other divisions including defense and helicopters.
- General Dynamics reported earnings for the fiscal year ended December 31, 2011, that included revenues of $32.7 billion of which $6.0 billion (18.3%) came from Aerospace. GD's aerospace division includes business aviation services, Gulfstream business jets, and military and government Gulfstream special missions jets. GD does not breakdown revenues from military jets and business jets in its press release, which is why I listed the value of commercial and business planes as less than 18.3% in the table.
- In its earnings release for the year ended December 31, 2011, Textron reported revenues of about $11.3 billion of which $3.0 billion were attributed to its Cessna aircraft division, comprising 26.5% of revenues. Other revenues come from segments including helicopters and defense-related products and systems.
As you can see, there is a wide variation of p/e ratios for the airplane manufacturers compared in the table. As all of these companies manufacture other products than airplanes, I wanted to look at a breakdown of the source of revenues from commercial and business aircraft to try to gain some insight into possible reasons for the widely varying p/e ratios for all of the companies in the table.
Prior to analyzing this, it is worth noting that all of the companies in the chart except Bombardier derive significant revenues from the defense sector. In contrast, Bombardier sold its military aviation services division in 2003. Bombardier still owns a military aviation training unit, which had a backlog of $0.8 billion at the end of the last reported fiscal year, representing 1.6% of the company's backlog. This means that relative to its aviation competitors in the above table, Bombardier has negligible operations related to defense, and those operations are not involved in the manufacture of weapons.
This is of note since some ethical investors do not want to invest in weapons-manufacturers such as Boeing. One might expect investment aversion by this group would lead to lower multiples for companies that manufacture weapons. Further as governments around the world are trying to reduce deficits, they are giving a further reason for investors to expect lower multiples for defense companies.
To further assist in the above comparison, a pure play in defense, Lockheed Martin (LMT), had a trailing p/e ratio of 9.24 as of the February 15, 2012 market close. Since this is a lower ratio than all of the companies noted above except Bombardier, it could be argued that if Mr. and Ms. Market value the defense component of those companies similarly to Lockheed Martin, then defense operations in effect have led to a reduction of the p/e ratios of Bombardier's competitors in the chart. In other words, if this proposition was true, Bombardier's competitors might have even higher p/e ratios if they were not in the business of defense. Since Bombardier is essentially not in the defense business, this makes it appear, at first glance, based on its low p/e ratio, to be even more undervalued than its competition in the chart.
So given the apparent unpopularity of the defense sector in which other aircraft manufacturers operate, what are some possible explanations for Bombardier's lower p/e than those competitors?
- Perhaps the market doesn't like the prospects of Bombardier's aerospace business as much as its competitors. This could be due to concerns that its new C Series single aisle planes designed to compete with Boeing and Airbus will not be successful. With the C Series scheduled to fly for the first time this year, there are obviously risks involved in investing in an unproven product. However, Boeing has experienced several years of delays for its own 787 Dreamliner. As airlines have just announced plans to raise fares to cover rising fuel prices there is a major incentive for the airlines to get their hands on energy efficient planes. As Bombardier stated in its last annual report that it hopes its C Series planes will deliver a 20% fuel burn advantage, and a 15% cash operating advantage, there is a major incentive for airlines to consider these planes if these goals are attained. Further, as airplane manufacturers have backlogs of orders for energy efficient planes, there is an incentive for airlines to get well-performing fuel efficient planes into their fleets as soon as possible from whatever manufacturer can supply them at a reasonable price.
- Perhaps the market views prospects for Bombardier's train business as worse than prospects for the defense sector. Defense spending isn't the only government spending at risk as world governments try to reduce deficits. It's possible investors fear that city, state, and federal governments may also be forced to cut transportation spending. Investors who believe this may not want to be involved in a stock relying upon the train business for 50% of its revenues. However, investors who believe that a limited quantity of oil makes trains the likely preferred method of ground travel for the future may think otherwise.
- Perhaps global investors are just overlooking the Canadian company Bombardier, as it does not trade on the NYSE, NASDAQ, or Euronext. If this is the case, investors may wish to look further at the fundamentals of companies of interest in the chart to come to their own conclusions as to why Bombardier's p/e is lower than its airplane competitors. However, regardless of whether investors think Bombardier is undervalued, they may want to keep it on their radar to compare its fundamentals and ratios to the stocks of companies they buy on other exchanges, to try to determine if those stocks are of relatively good value. They also may want to keep an eye on Bombardier to see whether its new products are successful relative to its competitors.
- Or perhaps its p/e is lower due to any one of the other countless factors that could lead investors to prefer one stock over another, including that p/e ratios may seem artificially high or low due to atypical results for one particular year compared to other years. Bombardier is scheduled to release fourth quarter and year end results for the fiscal year ended December 31, 2011, on March 1, 2012, according to the company's Investor Relations Event Calendar. Those results and investors' reactions to the results may help provide insight to other investors in the airplane or train industries who may also be wondering why Bombardier's multiple seems relatively low compared to its competitors.
Disclosure: I am long BBD.B shares listed on the Toronto Stock Exchange.