Written by SmallCapPower

Bombardier Inc. (BDRBF), one of the world’s leading manufacturers of both planes and trains, has pinned much of its future growth prospects to the fate of the C Series, a pair of narrow bodied commercial jets that have shown promise. The CS100 seats 108-133 passengers, while the larger CS300 seats 130-160. The C Series development has been delayed due to its high budget requirement. The provincial government of Quebec invested $1 billion into the C Series program to ease concerns over Bombardier’s liquidity.

Going forward, as more and more orders flow in, Bombardier can boost its profits by increasing its selling price. It is currently selling at a much lower price, which is a necessary investment in order to achieve the volume and scale to maximize profits in the long term. Taking into consideration initial investment and future demand, we expect the C Series to be a positive contributor to the bottom line by 2020.

Investment Thesis

• ...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 portfolio in the industry serving customers worldwide

Bombardier...operates under four reportable segments: Business Aircraft, Commercial Aircraft, Aerostructures and Engineering Services and Transportation...[with] 66,000...employees...[working at] 73 production and engineering sites in 29 countries...[around the world].

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 much stronger 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...

De-risked business with CDPQ and Government of Québec equity investments

...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, Bombardier has secured the liquidity necessary to fully execute the final two phases of its turnaround plan, which is two C series programs and 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.

All figures in Canadian dollars

Financial analysis

For the second quarter 2017, Bombardier reported revenues of C$4.1 billion. EBIT before special items grew to C$164 million, up 55% over the same period last year.

• Highlighting the Company’s performance in the second quarter were 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.

All figures in Canadian dollars

Valuation and outlook

Bombardier currently trades at a high forward PE of 30.0x. Going forward, as C series becomes successful and as more orders flow in, the Company can boost its profits, which can get its PE to a lower range.