Unknown Foreign Opportunities: Bombardier
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The aerospace industry has been one of the hottest investing topics in recent years. The industry continues to progress through the beginnings a long-term secular bull market for modern and more efficient aircraft. Less discussed in America is another secular bull market -- this one for rail transportation, especially in Europe, Asia and the emerging markets. One company poised to capitalize on both of these long-term trends is Canada’s answer to Boeing and the largest rail vehicle maker in the world: the Toronto Stock Exchange-traded Bombardier (NASDAQOTH: BDRBF) (TSX: BBD.B).
The (not so) friendly skies
Although Boeing (NYSE: BA) and the European Aeronautic Defence and Space Company (EADS), the parent company of Airbus, get the majority of the aviation headlines as they battle for supremacy in the large aircraft segment, Bombardier has quietly carved out a profitable niche for itself as the world’s largest business and regional aircraft manufacturer.
Business aircraft make up 50% of Bombardier Aerospace’s revenues. Bombardier is the undisputed industry leader in the sector with its Learjet brand. Commercial aircraft, however, currently make up about just 20% of the aerospace division’s revenues. This is an area Bombardier will look to improve upon next year when it begins to compete more against Boeing and Airbus with the introduction of its brand new family of aircraft: the Bombardier CSeries.
The Bombardier CSeries is larger than Bombardier’s CRJ family of narrow-body regional aircrafts. While the various CRJ variants can seat between 50 and 104 passengers and a maximum range of about 2,300 miles, the CSeries variants will seat as many as 160 passengers and have a maximum range of nearly 3,000 miles. This larger regional jet has Bombardier gunning directly for Boeing and Airbus, as the larger CSeries will compete head-to-head with the similar-sized Boeing 737s and Airbus A320s families of regional aircrafts.
Young blood vs. the old guard
Boeing and Airbus certainly appear to have the advantage when it comes to company size and scale. Operating for all intents and purposes as duopoly in the larger aircraft space, the two have been able to crowd out many other would be competitors. But what Bombardier lacks in company size, it makes up for in innovation. While Boeing and Airbus current generation of 737s and A320s are based on much older designs that have been in production for 17 and 25 years, respectively, Bombardier CSeries is a brand-new design built from the ground-up (and not simply an update of a previous aircraft production model).
The CSeries is a truly modern aircraft made with lighter-weight composite materials, more eco-friendly engines and the latest in aerodynamic advancements that easily outclasses the aging family of 737s and A320s in both fuel economy and carbon emissions. When the CSeries has its first flight in June of this year, it will achieve a roughly 20% reduction of fuel consumption over the current Boeing 737-700 and Airbus A319. For airlines looking to save every dollar they can with sky high (pardon the pun) jet fuel prices, a 20% reduction is something that no airline can afford to ignore. With the company set to make its first deliveries of the CSeries next year, this airplane has the potential to be huge for a company the size of Bombardier.
Bombardier has gone some through significant changes during the past 10 years. Unlike the other major aerospace companies, Bombardier no longer has any exposure to military aircraft. Divesting its military-related divisions in 2003 has allowed the Bombardier Aerospace division to concentrate entirely on the civilian aircraft market.
This divestiture is particularly advantageous today, as the American defense frets over the possibility of automatic government cuts to defense spending, known as sequestration. This leaves Boeing, as well as EADS, having to deal with the implications of military spending cuts not just in the United States, but elsewhere as other world governments also look to cut military spending.
Over on the rail side of the company is Bombardier Transportation. As people and governments become increasingly concerned about the effects of carbon emissions and climate change, rail transportation remains the only option for an environmentally and economically viable mode of transportation for high volumes of passengers. And with an estimated 2 billion people projected to reside in the 600 largest cities by 2025, rail transportation will become an increasing necessity not too far in the future, particularly in the emerging markets.
As the world’s largest rail vehicle manufacturer, Bombardier is uniquely positioned to take advantage of this long term demographic trend towards urbanization and the need for environmentally-friendly mass transportation systems.
The Bombardier Transportation division product mix includes all manners of rail vehicles; high speed trains, commuter and regional trains, intercity train, light rail vehicles, metros, monorails, airport people movers and freight locomotives. Bombardier is indeed a rail vehicle maker without equal. Bombardier Transportation is even responsible for the world’s most well-known monorail, the Walt Disney World Monorail System.
A Bombardier outranks a general?
Being the world’s largest does not mean you are without large competitors in the same sector. Also operating in the rail vehicle sector is the American multinational conglomerate General Electric (NYSE: GE). As a maker of rail vehicles, GE could be a formidable rival to any company in any industry. General Electric, however, is almost exclusively a manufacturer of freight locomotives, while Bombardier is almost exclusively a manufacturer of passenger rail vehicles. So despite the presence of a $235 billion gorilla in the same general sector as Bombardier, the two companies actually have very little product overlap.
And while Bombardier's focus is equally shared between its aerospace and rail vehicle divisions (where the two divisions each make up almost exactly 50% of Bombardier's total company revenue), rail vehicles will never be a primary focus for General Electric. Being a conglomerate, General Electric’s hands are in a little of everything (from financial services to wind energy to television and movie entertainment), preventing General Electric from ever focusing entirely on any one business. This is, of course, much to the benefit of Bombardier.
The only way to travel
Although investing in foreign exchange traded companies like Bombardier can add an extra layer of difficulty, the additional work can often greatly benefit your stock portfolio. The best and brightest companies in any given sector are not necessarily based in the United States or traded on a US stock exchange. As one of the largest civilian aircraft and rail vehicle maker in the world, yet relatively unknown in America, a little extra effort and research into Bombardier could be well worth your time and money.
WhichStocksWork owns shares of Bombardier Inc. The Motley Fool owns shares of General Electric Company. 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!