Byron Capital's Astle says Bombardier's COMAC Deal Reduces Risk

Inside a full scale model interior of a Bombardier CSeries. Byron Capital analyst Tom Astle says the company's commercial aircraft business has been a drag on overall valuation, but may be improved by its recent deal with the Commercial Aircraft Corporation of China.

Bombardier (TSX:BBD.B) today provided some detail on the agreement it signed with the government owned Commercial Aircraft Corp. of China Ltd. (COMAC), on March 24th. The aircraft manufacturing giants will collaborate on the C919 and CSeries Aircrafts.

Today’s press release explained how COMAC and Bombardier will work on four initiatives they expect to complete within the next year; the cockpit human-machine (crew) interfaces, the electrical system, the development of aluminum-lithium standards and specifications and areas of customer services, such as technical publications and co-location of teams.

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Byron Capital’s Tom Astle says the CSeries is expensive and has very small order book, and that the value of Bombardier’s stock is supported by its train and business jet segment and “likely attributes a negative value for the commercial aircraft business.” On March 1st, Astle reduced his target on Bombardier to $6 from $6.50, mainly due to concerns that the CSeries might be a drag on valuation.

While, he says, today’s news makes sense and “reduces the risk that the commercial side holds back the valuation” Astle maintained his $6 twelve-month target, which he bases on segment valuation analysis and 13x his 2013 EPS estimate. The Byron analyst did point out that if overall business conditions improve, the business jet portion of Bombardier’s business could begin to contribute to the overall valuation of the stock.

Shares of Bombardier on the TSX closed today up 3.2% to $4.18.

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