Is the Bombardier Sell-Off Overdone?

The market's negative reaction to Bombardier Inc.'s (BDRAF.PK) stellar second quarter results that trumped consensus expectations is out of line, says RBC Capital Markets analyst Nick Morton.

Shares in Bombardier slumped as much as 15% or C$1.25 to C$7.15 following the announcement Thursday morning before market open that the airplane and train maker swung to a Q2 profit of C$246-million, or C$0.14 a share. The stock was up C$0.08 to C$7.58 Monday afternoon.  

In a note to clients, RBC Capital Markets analyst Nick Morton said:

The negative reaction was based on concerns about Bombardier's low level of orders for regional jets and turboprops, compounded by the announcement that Mitsubishi will assist Boeing in marketing Boeing's new RJ, set for delivery in 2013.

We believe these concerns are overblown and that the medium- and long-term prospects for Bombardier Aerospace and its global Transportation/rail business remain excellent.

Mr. Morton said the outlook is positive for business jets even though the book-to-bill ratio for business jet orders in the second half will be lower than in Q2.

As for Bombardier Transportation, the analyst said the division is coping with a problem contract in North America that may limit margin improvement in the second half. But, he added, management is still confident they will reach the 6% EBIT margin next year.

He left his buy rating and price target of C$11 unchanged.

CIBC analyst Chris Murray, meanwhile, increased his price target from C$11 to C$11.50 and maintained his "sector performer" rating. 

In a note to clients, he said:

Additional catalysts and the continuing capability to increase earnings through improving margins should combine to move share prices higher.