Is Rail Enough for Bombardier?
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Bombardier Transportation's (TSX: BBD.B) hope of securing a $1.6 billion British rail contract got brighter on July 5, after German competitor for the contract, Siemens (NYSE: SI), withdrew its bid for the Cross rail project. However, the firm needs to secure itself in the airline division of operations -- which account for about 15% of sales -- if it wants to realize maximum profit potential.
Bombardier air division is unclear
While Bombardier looks poised to rake in profits from rail, the airline division of operations is in doubt. The firm has lost share to Embraer, and that has resulted in Bombardier's market share in regional jets falling from 48% in 2005 to 24% in 2011. However, the company has launched an ultra-long-range and extra-large Global 7000 and 8000 aircraft, which could rake in future sales. The firm stated in a forecast report that it expects to have 10,000 orders for business jets between 2011 and 2020. That equates to a forecasted revenue intake of $133 billion during that period.
Siemens looks to be over capacity
Siemens told the Montreal Gazette on July 5 that it will not proceed with the process to secure the Cross rail project due to increasing obligations in other areas of the firm's operations. That news should be taken with mixed reactions from investors, who could feel comforted that the firm has its hands full with business, but it puts into question the company's ability to grow. Backing down from such a large contract is potentially missing out on a slew of revenue, and missed opportunities could be repeated if the company is already at full capacity.
One of the major projects at the company includes the $2.5 billion Thameslink project that the firm secured during a battle with Bombardier in 2011. But even with that project, it appears the company is over capacity. After all, the firm's high-speed trains that were supposed to be delivered to Deutsche Bahn, are expected to be four years late. Furthermore, the firm is delayed on orders to Eurostar for high-speed trains that would link Paris to London and Bussels.
Boeing could control too much market share for Bombardier
Much of Bombardier's success depends on its ability to profit from its airline business. That makes Boeing (NYSE: BA) a major competitor, particularly during a time when the firm expects a doubling of aircraft in the next two decades.
Boeing has consistently shown its prowess at luring aircraft buyers to its product with United Airlines as a major buyer. At the Paris Air Show alone, the firm managed to claim orders at about $66 billion. Those orders set the business up nicely for at least the next ten years, as that is how long it takes to fill many of the orders. The amount includes around 442 aircraft.
Does Bombardier warrant a buy?
While I am not an investor who makes purchases based on speculation, I see major potential in Bombardier's ability to increase profits if it secures the Cross rail project. Furthermore, the firm is willing to take on more business, unlike Siemens, and that could mean the company will have less competition to worry about for future projects.
However, Bombardier needs to show that its aerospace sales can compete with competitors such as Boeing. According to officials with Boeing, air traffic is set to double within the next two decades. That shows major potential for Bombardier, though that division of the company has performed below market average since 2008.
As a final note, it should be noted that Bombardier is a diversified company, with its air and rail operations, while Boeing only operates in the aerospace field. I'm cautiously optimistic about Bombardier, though I think current activity indicates the firm will increase exposure to rail projects while decreasing activity in its aerospace division.
Phillip Woolgar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!