Bombardier Rallies as CSeries Prepares for First FlightFrederic Tomesco
Bombardier Inc. is rallying on optimism that the CSeries jet, the company’s biggest ever, will meet a June deadline for its maiden flight after a six-month delay shook investors’ confidence.
An 18 percent surge in May for the widely traded Class B shares was the best monthly jump since September 2009. That pushed Montreal-based Bombardier to a 25 percent gain in 2013, the third-most among industrial companies on Canada’s Standard & Poor’s/TSX Composite Index, and the shares rose again today.
Bombardier is counting on the jet as a catalyst for almost doubling annual revenue by decade’s end. While the CSeries won’t be at this month’s Paris Air Show, the highest-profile industry forum for new models, a June takeoff would help an image marred by a dearth of orders and a surprise postponement in November a month before the plane’s planned debut.
“They’re on target with the CSeries, and that’s really what’s driving the stock now,” said Marc-Andre Robitaille, who manages about C$760 million ($733 million) in equities for AGF Investments Inc. in Montreal and holds Bombardier stock. “There’s good momentum to the story.”
Bombardier climbed 1.1 percent to C$4.75 at the close in Toronto. That added to a year-to-date jump for the Class B shares that outpaced gains through May of 1.7 percent for the S&P/TSX Index and 16 percent for the 20 stocks on the industrials sub-index.
Chief Executive Officer Pierre Beaudoin affirmed his first-flight target in May, reassuring investors about a program whose orders are still less than half the goal of 300 planes by next year’s first delivery. Development costs for the jet may reach about $3.4 billion, Mike Arcamone, president of Bombardier’s commercial aircraft unit, said March 7 at a presentation in Mirabel, Quebec.
A first flight this month “looks good,” Chet Fuller, Bombardier’s senior vice president/commercial, said yesterday in Cape Town, South Africa, before the annual meeting of the International Air Transport Association.
The CSeries is intended to compete with the smallest Boeing Co. and Airbus SAS narrow-body jets and will carry as many as 160 people, a step up from Bombardier’s signature regional jets with fewer than 100 seats. Bombardier cited unspecified supplier “issues” when it said on Nov. 7 that the December first-flight timeline was being pushed back by six months. In the days afterward, the shares slumped to the lowest since March 2009.
“There was a lot of anxiety as to whether the CSeries was going to get going,” David Tyerman, an analyst at Canaccord Genuity, said in a May 28 telephone interview from Toronto. “The critical part from an investor standpoint is getting the plane in the air and into the certification process. There have been some aerospace programs that have had problems in the last decade. Execution is the big thing here, as opposed to orders.”
Beaudoin told Bloomberg News in March that Bombardier would forgo displaying the CSeries in Paris in order to finish testing before the June 30 deadline. A first flight may act as a trigger for orders as some airlines wait for the plane to get airborne, said analysts including Chris Murray at PI Financial Corp.
“First flight is a major milestone for a lot of people,” Murray said by phone from Toronto. “If they could announce a significant number of orders, that would really help the stock. If orders take off, it could go north of C$7.”
Firm orders through the end of March, the most-recent data available, totaled 145. Those deals have typically been for handfuls of planes, compared with the scores or hundreds of jets common for established single-aisle models from Boeing and Toulouse, France-based Airbus.
EasyJet Plc, Europe’s second-biggest discount carrier, has said it’s considering the CSeries, and an order announcement in Paris “would clearly be highly positive for Bombardier,” Cameron Doerksen, an analyst at National Bank Financial in Montreal, said in a May 28 note to clients.
A successful test flight won’t end Bombardier’s challenges with the plane.
In trying to crack the Boeing-Airbus duopoly, Bombardier is offering one model against manufacturers making everything from short-haul, narrow-body planes such as the 737 and A320 up to long-range wide-bodies including Chicago-based Boeing’s four-engine 747 jumbo jet and Airbus’s A380 doubledecker.
The gap between a first flight and commercial service also may be longer than Bombardier’s estimate of about a year, according to Ronald Epstein, an analyst at Bank of America Corp. in New York.
New plane programs such as the A380, the 787 Dreamliner and Embraer SA’s E-190 have taken an average of two years from first flight to entering commercial service, Epstein wrote in a May 15 note to clients. That suggests a CSeries delivery may not take place before 2015’s second half, he wrote.
Bombardier continues to expect that the jet will enter service in mid-2014, said Marc Duchesne, a spokesman for Bombardier’s aerospace unit.
“The key concern for investors is that the CSeries fails to take off on time, delaying the associated cash flows,” Anthony Scilipoti, an analyst at Veritas Investment Research in Toronto, said in a May 10 note. “Bombardier’s stock is not for the faint of heart, and we recommend staying on the sidelines as the risk-reward is not yet in your favor.”
John Stephenson, a fund manager with First Asset Investment Management Inc. in Toronto, said Bombardier’s valuation makes the shares attractive.
Bombardier traded at a discount of 30 percent to the S&P/TSX index on a price-earnings basis on May 31, according to data compiled by Bloomberg. Relative to the S&P/TSX industrials index, the discount was 40 percent. The planemaker’s P/E ratio based on estimated 2013 earnings was 11.6.
“Bombardier is an inexpensive stock,” Stephenson said in a May 29 telephone interview. “It will do well in a recovering world. People are seeing a general recovery in North America, particularly the U.S., and that portends well for industrial stocks such as Bombardier. Its star is on the rise.”
Among 24 analysts surveyed by Bloomberg, the company has ratings of buy or the equivalent from 71 percent, the highest percentage since October, according to data compiled by Bloomberg. Murray and Tyerman recommend the stock as a buy while Doerksen has an outperform rating. Scilipoti had the lone sell rating in the Bloomberg survey.
Bombardier Aerospace President Guy Hachey told investors March 21 he expects the CSeries to contribute $5 billion to $8 billion in additional sales later this decade, part of a $10 billion to $16 billion annual revenue boost from new products. Bombardier had revenue of $16.8 billion last year.
“We are getting closer to the point where results should start improving, and that’s generating interest in the story,” Canaccord Genuity’s Tyerman said. “Toward the end of this year, things should start to shape up a lot better.”