On the first day of December last year, Bombardier (TSX:BBD.B) reported its Q3, 2011 results. The Canadian conglomerate, which turns seventy this year, delivered double digit growth. Bombardier’s top line was up 16% over the same period in 2010, and the company earned eleven cents compared to just eight cents in 2010.
Bombardier’s stock, which had been slumping near the lower end of its ten-year chart, responded to the numbers in the second half of December, pulling itself up from $3.55 on December 16th to just under the $5 mark recently.
The recent numbers on Bombardier have caused Byron Capital’s Head of Research Tom Astle to argue with himself about whether the company has enough runway (pun intended) on its balance sheet, or whether it can takeoff on the back of better business conditions (also pun intended).
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One the one hand, says Astle, Bombardier has a weak balance sheet compared to its peers. And the company is capitalizing large amounts of development expenses that will eventually show up on its income statement. There’s also the issue of competition from Airbus and Boeing on its C-Series jets.
But Astle also thinks that the negative things he can point out are, for the most part, baked into the share price today. He estimates the worst case scenario on Bombardier is that its rail business is worth “at least $2.50 a share”, its business jet segment is worth $1.40 a share and the commercial jets portion of its business is worth $.10 cents a share, bringing the low end valuation on the stock to $4. For those who point out that shares of Bombardier have slipped below this line many times, Astle points out that investors have always had a chance to make money buying it there, and sub-$4 has proved to be an excellent entry point.
Bombardier is divided into two segments that deliver roughly the same amount of revenue, Bombardier Aerospace, and Bombardier Transportation. Bombardier Transportation is more profitable, EBIT from the division was $172 million in Q3, compared to $129 million from the aerospace division.
Astle says that while there are a number of caveats to be aware of in this “complicated” company, he can see a realistic scenario in which an improved economy and good execution by management can drive the value of the train side of the business to $3.70 a share, the business jet division to $3.90 a share, and the commercial jet business to $1 a share, for a total value of $8.50. In a report to clients today, the Byron analyst said he was restarting coverage on Bombardier with a twelve-month target of $6.50 cents.
Shares of Bombardier closed today up 2% to $4.67.