TD Fall Investing GuideTD Fall Investing Guide
http://www.canadianbusiness.com (© Rogers Digital Media 2013, All Rights Reserved.)
Updated: Fri, 18 Jan 2013 09:10:00 GMT | By Richard Warnica

Bombardier pulls out of nosedive

Manufacturer lands its largest sale yet.


Photo: Courtesy Bombardier

Photo: Courtesy Bombardier

The half-life of news about Bombardier seems to be growing shorter all the time.

In the fall, the company's stock was in a nosedive. A six-month delay in production of its new CSeries commercial jet line had analysts bearish and executives sweating. President and CEO Pierre Beaudoin fielded a swarm of questions about the setback during a third-quarter earnings call. His answers were not reassuring. In the aftermath of the call, Bombardier stock, which had traded above $7 a share as recently as the summer of 2011, dipped below $3 for the first time since the depths of the financial crisis.

But then, at the end of November, the stormy skies turned sunny again. Bombardier announced what could become the single largest sale in company history, a deal to sell as many as 142 Global-line business jets to VistaJet for US$7.8 billion. With that, share prices picked up, climbing nearly 10% in a single afternoon.

For most analysts, the VistaJet deal was all gravy. The sale came with a guaranteed purchase of 56 jets for US$3.1 billion, with options for the rest. It arrived on the heels of earlier large business-jet sales to VistaJet and NetJets, and firmed up Bombardier's leadership in the long-distance luxury plane market. "Perhaps more importantly, it also provides further evidence that the high-end segment of the market (read: high margin) remains robust in the wake of recent global macroeconomic jitters," wrote Raymond James analyst Steve Hansen in a note to clients.

Bombardier pulls out of nosedive

Crucially, the deal should also improve Bombardier's cash flow. The company's aerospace group has about $2 billion tied up in development projects, mostly on the CSeries and Learjet lines, says Stonecap Securities analyst Scott Rattee. A deal of this size likely involved a deposit of about $300 million, Rattee believes, money that can go directly into funding R&D. "Not only is it terrific business," he says, "but it actually helps the organization overall."

That doesn't mean the deal is perfect. To book a sale this large, Bombardier likely had to offer VistaJet a sizable discount from the list price on individual jets. But Rattee, for one, isn't too worried about how that will affect the company's margins. Bombardier doesn't have a lot of competitors for planes like the ones VistaJet is buying, especially in that kind of volume. What's more, it now does its own "completion" work-the high-margin business of finishing a plane's interior-in house, which should increase its profit per plane, no matter what the initial discount.

There remain doubters. Jacques Kavafian, an analyst with Toll Cross Securities, believes the market overreacted to the VistaJet sale. While $7.8 billion seems like, and is, a lot of money, Bombardier is a big company. It needs $18 billion in sales every year just to keep up its current pace. "So yeah, this is a big order, but they need big orders," Kavafian says. Like many, he points to the CSeries, which is expected to be ready for test flights in June, as far more important to the company's long-term success than a handful of big deals in the business line.

Luckily for Bombardier, there's good news on that front too. Just before Christmas, Latvia's AirBaltic confirmed a tentative order for 10 CSeries jets. That news came just hours after Bombardier announced that an unnamed airline in the Americas plans to buy at least 12 and as many as 30 of the new commercial planes. Those two orders were the first for the CSeries in five months, and by mid-January they had helped push Bombardier shares above $4 for the first time since July.

In the aerospace field, big orders often beget more orders. That may well be the case for Bombardier here. If it is, it should mean more good news to come for a company that hasn't exactly had a surplus of it in recent years.

More stories from Canadian Business

Scroll upScroll down

Recently recommended stories

advertisement