A 220% duty imposed by the United States is a huge blow for Bombardier Inc. (TSX: BBD.B) but much of its future growth will likely come from growing economies overseas
SmallCapPower | September 29, 2017: Bombardier Inc. (TSX: BBD.B), one of the world’s leading manufacturers of both planes and trains, which had pinned much of its future growth prospects on the fate of its C Series jets, is now under a huge threat from the recent imposition of a 220% duty on the C Series by the U.S. Department of Commerce. The ruling is in response to a complaint by Boeing (NYSE: BA) that alleged Bombardier of dumping C Series jets into the American market at an unfairly low price with help of government subsidies. Boeing charged that Bombardier had received at least $3 billion in subsidies from the governments of Britain, Canada and the province of Quebec. This 220% duty is a huge blow given that the United States represents about a third of the potential global market for this type of aircraft.
Read: Bombardier (TSX: BBD.B) Stock: Is it Worth the Risk?
Another threat comes from losing out on the rail deal with Siemens AG to Alstom SA. French fast-train maker Alstom SA confirmed that it is negotiating with Siemens on the train transaction. The deal, if approved, would be a blow to Bombardier, which had recently been in final stage negotiations with Siemens on the train agreement. If the Siemens-Alstom deal goes through, Bombardier’s ailing train-making unit would continue to be exposed to intense competition from China’s CRRC Corp Ltd.
Bombardier initiated a five-year turnaround plan two years back to reduce its costs. These measures did help the Company recover somewhat over the past year as evidenced by decent revenue growth and operating margins. However, the recent twin setbacks – loss of the train deal with Siemens AG and a hefty tariff on its C Series jets to the U.S., could put the turnaround plan in jeopardy.
Investment Thesis
- Broadest and most innovative portfolio in the industry serving customers worldwide
- Positive long-term outlook for the 100-150 seat commercial aircraft category (C Series program)
- Disciplined FCF performance
- De-risked business with CDPQ and Government of Québec equity investments
Broadest and most innovative portfolio in the industry serving customers worldwide
Bombardier is one of the world’s leading manufacturers of both planes and trains, operating under four reportable segments: Business Aircraft, Commercial Aircraft, Aerostructures and Engineering Services and Transportation. Bombardier provides more efficient, sustainable and enjoyable transportation solutions. The Company’s products, services, and 66,000 dedicated and highly-skilled employees are the key differentiators, which make the Company a global leader in mobility and innovation. Bombardier has 73 production and engineering sites in 29 countries and a worldwide network of service centers.
Strong fundamentals supporting the positive long-term outlook for the 100-150 seat commercial aircraft category
Globally there is a weak demand for big planes but strong demand for small planes. The situation becomes clearer when global demographic trends are considered. Emerging market economies such as China and India have rapidly expanding middle classes. This has led to an explosion in regional air traffic between the different cities within these markets. Air travel is a luxury that is becoming affordable to more and more people across the developing world, not just international travelers from wealthier nations.
De-risked business with CDPQ and Government of Québec equity investments
Bombardier completed the first and critical de-risking phase of the turnaround plan. By closing the CDPQ and Government of Québec equity investments, extending credit facilities and refinancing $1.4 billion of senior notes and extending their maturity dates to 2021, the Company has secured the liquidity necessary to fully execute the final two phases of turnaround plan, which is the C Series program and a de-leverage balance sheet.
Disciplined FCF performance
Historically, Bombardier has achieved high-quality financial results. In 2016, the Company delivered full-year results above EBIT and FCF guidance ranges and exceeded margin targets in Transportation, Business Aircraft and Commercial Aircraft.
Financial analysis
For the second quarter 2017, Bombardier reported revenues of $4.1 billion. EBIT before special items grew to $164 million, up 55% over the same period last year. Highlighting the Company’s performance in the second quarter was strong orders at Transportation, which reported a book-to-bill of 1.4. Transportation’s operational transformation and site specialization strategy also continues to gain traction, with key milestones announced in the quarter for its operations in Germany, Switzerland and Belgium. In Business Aircraft, Bombardier’s all new, class-defining, ultra-long range business jet, the Global 7000, exceeded 500 flight-test hours, and remains on schedule to enter service in the second half of 2018.
Valuation and outlook
Post the twin setbacks, Bombardier shares have dropped more than 10% during the past few days. Bombardier currently trades at a high forward PE of 26.25x and EV/EBITDA of 27.53x, which we believe is too high given the dimmed growth prospectus for C Series aircraft in the U.S. post the astronomical 220% duty imposition. Additionally, if the Siemens-Alstom deal goes through, Bombardier’s ailing train-making unit would continue to be exposed to intense competition from China’s CRRC Corp Ltd. This could put continued pressure on the Company’s share price in the near term. Despite the recent turmoil in the U.S., Bombardier has been able to seal a deal with Latvian state-owned low-cost carrier Air Baltic to sell at least 14 C Series planes with a list value of about $1.25 billion. Also, Bombardier is in talks with China’s three big airlines for C-Series deals and aims to close deals in the upcoming months. Overall in the short term, we see that the Company’s shares will be under pressure due to the closure of the U.S. markets for C Series, but in the long term there is huge potential for the C Series outside of the U.S., especially in the large and growing economies such as China and India, where there is a strong demand for smaller planes.
Disclosure: Neither the author nor any of the principals at SmallCapPower, or their family members, own shares in the company mentioned above.
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