Disappointment And Delay: How Can This Manufacturer Turn Things Around?
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It was a rough end of June for Canadian manufacturer Bombardier (TSX: BBD.A) (TSX: BBD.B). With high hopes resting on its new C Series airliner, the plane received no new orders at the Paris Air Show and the company decided to delay the inaugural flight of the C Series until the end of July. Shares of Bombardier have reflected this disappointment and have fallen well off their peak of around CAD$5 per share.
C Series troubles, rivals successes
While the Bombardier C Series did not tally any new orders at the Paris Air Show, regional jet rival Embraer SA (NYSE: ERJ) made airplane orders headlines announcing multiple big unit orders. Reuters reports some of these orders originated from regional operator SkyWest and American International Group’s aircraft leasing subsidiary, International Lease Finance Corp. Some analysts have even gone as far to say that these Embraer orders threaten the C Series due to the larger size of the latest Embraer jets.
With these new orders for hundreds of aircraft, Embraer's backlog of orders has increased showing a strong demand for the manufacturer's aircraft. Most analysts expect an increase in earnings per share over the next few years to reflect Embraer's fulfillment of these orders. While Embraer does have sufficient orders right now, the manufacturer is reportedly in talks with AMR Corp, parent of American Airlines about the purchase of regional jets for its American Eagle subsidiary. Talks for this deal are still happening behind closed doors so it is difficult to decide whether AMR will select Embraer or Bombardier for the jet deal. Whichever manufacturer that wins the sale should expect a boost in its share price to reflect an increase in future aircraft deliveries.
But the C Series, especially the larger CS 300, have a greater passenger capacity and Bombardier is targeting these planes at airlines in need of longer range aircraft. By contrast, Embraer’s jets are set to replace many existing regional jets, including outgoing Bombardier CRJ200s that are not economically efficient due to higher fuel consumption per passenger.
But perhaps the biggest disappointment for Bombardier investors and C Series followers was the delay of the aircraft’s flight from the scheduled end of June to the end of July. There is also an expectation that some carriers are waiting for the plane to take flight before placing orders meaning the flight delay could be delaying new C Series orders. Bombardier is voicing confidence in its July flight but we will still have to see the plane actually take flight before we can confirm it will indeed take off when Bombardier says it will.
On the flip side, this opens up the possibility of a wave of orders coming in during August providing a positive catalyst for Bombardier shares. This is in no way a guarantee but even the first flight should be seen as positive news by investors possibly giving lift to shares on its own.
Despite the large amount of press the C Series has been seeing lately, it is important to remember that Bombardier is a plane and train manufacturer. While the C Series is still waiting for its maiden flight, Bombardier looks closer to closing a CAD$1.6 billion train deal in the U.K. The Globe and Mail reports that Bombardier’s top competitor for the contract, Siemens AG (NYSE: SI), has withdrawn from the bidding. The Globe says that Siemens has other orders on its hands that are already facing delays. One of these includes a high speed train order from Eurostar and another is a long delayed order from Deutsche Bahn. While Siemens does have a train division, the company itself does far more than just trains with parts of its business in everything from energy to healthcare. As a company many times the size of Bombardier by market cap, Siemens is unlikely to feel much of any pain from not winning this latest contract, especially with its train division already running near full capacity. The German manufacturer seems to have recognized its current limits in this part of its business and where Siemens leaves, Bombardier stands to gain.
While there are still other competitors for the contract, The Globe considers Bombardier to have “the inside track” in the bidding now as a result of Siemens' departure. As part of the deal for winning the contract, Bombardier would likely build the trains in its Derby factory saving over a thousand British jobs in the process.
Near term catalysts
With the slide in Bombardier stock from its peak and the recent disappointment surrounding the C Series, investors in Bombardier are looking for positive developments from the manufacturer so it can begin to move higher. As previously discussed, the C Series is now set to take flight by the end of July and the successful completion of this maiden flight could not only provide a boost by showing the plane is on track but the flight could also cause more airlines to place orders.
As a manufacturer with focuses on planes and trains, an announcement of sealing the deal on the British train contract could propel Bombardier shares higher. Not only would the train deal be seen as a positive development from a financial standpoint but the train contract could help to direct attention away from the delay in the C Series.
Planes and trains
Bombardier has put a lot of investment in both time and money into the C Series aircraft. The more than $3 billion investment into the C Series is more than double the size of the potential train contract described above. But while the C Series has seen some delays, so have other all new aircraft from Boeing and Airbus leaving Bombardier as following an industry pattern. If the C Series does actually take flight in July then it could provide a positive catalyst for Bombardier shares while the train order could provide other positive news if Bombardier manages to win the contract. With the flight of the C Series approaching and deliveries set to begin in 2014, the next few years should be a very exciting time for Bombardier.
Alexander MacLennan owns shares of Bombardier. He is also long $17 Jan 2015 calls on US Airways (an airline expected to merger with AMR Corp in the near future). This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool recommends Embraer-Empresa Brasileira. 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!