I recently wrote an article noting that Canadian airplane and train manufacturer Bombardier (OTCQX:BDRBF) was trading at a lower price-to-earnings ratio than aerospace competitors Boeing (BA), Embraer (ERJ), The European Aeronautics and Space Company (OTCPK:EADSY), General Dynamics (GD), and Textron (TXT). Specifically, at the close of markets on February 15, 2012, Bombardier had a trailing price-to-earnings ratio of 8.43 according to Bloomberg.
On March 1, 2012, Bombardier reported its quarterly and fiscal year end earnings for the period ending December 31, 2011. The day before the earnings release, the company's Class B shares, which trade under the ticker BBD-B on the Toronto Stock Exchange, closed at $4.75 Canadian. The stock closed at $4.05 Canadian on March 6, 2012.
Part of this decline may have been caused by headlines that Bombardier's fourth quarter earnings declined by 27% from $295 million (note Bombardier reports its results in U.S. dollars) or $0.16 per share in the "prior year period" to $214 million or $0.12 per share for Q4 2011.
That sounds bad -- but here's a problem with the headline numbers: they don't mention that the company changed its fiscal year-end from January 31 to December 31 so that its aerospace segment's year-end coincides with the fiscal year end for its transportation segment. This means that "the quarter" that was reported was only two months long for the aerospace portion of the consolidated results, and eleven months long for the consolidated annual results.
This is information that was explained in the earnings press release and on page 56 of the the 2011 annual report. As the company's third quarter 2011 earnings report indicated that the split in revenues between the transportation segment and the aerospace segment is about 50/50, obviously eliminating a month's worth of results can make the results seem worse than they actually were.
The company beat analyst expectations for the quarter of $0.11. Full year earnings were reported to be $837 million or $0.47 per share, an increase from $0.42 for the prior year. This resulted in a trailing p/e of 8.44 according to Yahoo after the close of trading on March 6, 2012.
A better way to compare Bombardier's results given the changes to the year end would be to look at its margins. For the most recent quarter, EBIT as a percentage of total revenues declined year-over-year from 7.2% to 6.3% for Bombardier Aerospace (see page 87 of the Annual Report); and declined from 8.2% to 7.2% at Bombardier Transportation (see page 105 of the report). For the full year, the EBIT margin declined from 6.3% to 5.8% at Aerospace; stayed constant at 7.2% at Transportation; and declined from 6.7% to 6.6% for the entire company. Management provided guidance on page 56 of the Annual Report of EBIT margins of 5% for Aerospace for fiscal 2012, and 8% by calendar year 2013 for Transportation.
On a positive note, the company's backlog increased from $52.7 million to $53.9 million for the year ended December 31, 2011, compared to the year ended January 31, 2011. The company also stated that it has no major debt maturing until November, 2016. Still investors may be concerned that the company plans on spending about $2 billion this year, primarily on aerospace development. The company indicated in its conference call and annual report that it expected capital expenditures to be at a high for 2012, as it projects the Learjet 85 and CS100 aircraft to enter into service in 2013. So investors may want to assess whether they believe these aircraft will enter service on time and will be successful thereafter.
In my previous article, I had suggested that the differences in p/e ratios between Bombardier and its competitors may have been due to the fact that Bombardier does not trade on the NYSE or Nasdaq, resulting in less attention being paid to the company. On February 16, 2012, the same day that the article was published, the CEO of Bombardier, Pierre Beaudoin, spoke with Jim Cramer on Mad Money. When asked about Bombardier's low multiple relative to other airplane manufactures, Beaudoin indicated that listing on the New York Stock Exchange was not a priority for the company at the time of the interview, but something that may be in the future of Bombardier.
I thought it would be interesting to compare Bombardier's multiples and market capitalization to some well-known Canadian companies that are listed on the Toronto Stock Exchange, and either the Nasdaq or NYSE. Specifically, the table below compares Bombardier to doughnut and coffee chain Tim Hortons (THI); big-screen technology pioneer IMAX (IMAX); yoga apparel retailer Lululemon (LULU); and BlackBerry-maker Research in Motion (RIMM).
All numbers are in Canadian dollars, taken from Yahoo Finance after the close of trading on March 6, 2012. Investors should confirm the accuracy of numbers from financial websites using their own calculations from data reported directly by companies, as financial web sites may have inaccurate information, and I have not confirmed Yahoo's numbers.
Trailing 12 Month P/E
Research in Motion
So we can see that Bombardier, the third largest civil aircraft manufacture in the world, and global leader in rail technology, according to its annual report, has a lower market capitalization than a yoga apparel retailer that had 165 stores at the end of the third quarter. Some might argue this comparison makes Bombardier the Rodney Dangerfield of Canadian stocks, while others might argue that Lululemon is the next Nike (NKE) and deserves its relatively high multiples.
Bombardier's forward and trailing p/e's are also lower than all of the Canadian companies in the table, except Research in Motion, which has had more than its share of problems over the past year or so. Even with the uncertainty of the popularity of RIM's products to be released in the future, its market capitalization is close to that of Bombardier. That said, despite BlackBerry's smart phone market share declining to 15.2% in the U.S. in January according to data from ComScore cited at Canada.com, BlackBerry remained the market leader in Canada in December, with 32.6% of the market.
RIM reminds us that while listing in the U.S. may put a company on the radar of a greater number of investors than listing in Toronto alone, it may also put it on the radar of investors or short-sellers having a different view of the company's prospects based on their personal experiences with the company's products or services.
Obviously, there are many company-specific factors that influence the multiples and market caps of the Canadian companies in the table. However, investors who believe that Bombardier would benefit from listing on a U.S. exchange, and that the company will actually take steps to do so may want to look closer at the company's most recent reports, as earnings headline numbers do not always provide sufficient information to make investment decisions.