Bombardier is a buy at these prices, this analyst says

Transport company Bombardier (Bombardier Stock Quote, Chart TSX:BBD.B) appears to be close to a sale on its commercial jet business, a move which may have some worried about its impact on the Canadian job front, but in terms of the company’s fortunes going forward, shedding the unprofitable CRJ business will likely make for a leaner company with better free cash flow, says analyst Michael Willemse of Taylor Asset Management, who likes the cheap price of the stock right now.

Aiming to narrow its focus on the more profitable segments of its business, Bombardier has been searching for a buyer for its commercial jet program for some time now, as news broke yesterday that it may have found a willing party in Mitsubishi Heavy Industries, with whom Bombardier is in discussion over the company’s CRJ regional jet business.

At the moment, Bombardier is providing no further commentary on the matter, saying that currently there is no assurance that a deal is at hand. Nevertheless, the market has responded by boosting BBD’s share price on Wednesday, closing up 7.5 per cent to $2.15. The stock has been in a tailspin since early March and at this point is virtually flat year-to-date.

Willemse says that a deal with Mitsubishi for Bombardier’s CRJ program would make sense for both companies.

“[Mitsubishi] is a logical buyer. They are a direct competitor to the program and they had been struggling with their own jet programs. They would probably be the one willing to pay the most money to buy it,” said Willemse in conversation with BNN Bloomberg on Wednesday.

“The two divisions left will be [Bombardier’s] business jet division and their rail division,” he says. “Their rail division sales are about $9 billion and their business jet sales are around $5 billion and growing to close to $8 billion over the next couple of years. So it’ll still be an almost $20-billion company. And they’ll still own 33 per cent of the C-Series, now called that A320, which still has a very positive outlook if Airbus can grow it successfully.”

Bombardier has been in the commercial aviation sector for the past three decades, with the CRJ program starting up in 1989, but the program has run into difficulties over the years, enough for the provincial and federal governments to be periodic supporters of the company and the Canadian jobs it has supplied.

Willemse says that shedding CRJ will make Bombardier much less likely to be asking for government subsidies going forward.

“This is actually the company getting out of the commercial aircraft programs that are tied to these types of government support. I actually like to see the company get away from that and just focus on its core operations and generating an attractive return on capital in its two businesses,” he says.

As far as the stock goes, Willemse thinks the company’s fundamentals are looking more attractive.

“If they continue to grow and improve the rail business and the business jet division, the company should be in the position to develop significant free cash flow —you’re looking at over $1 billion in free cash flow for a market cap today of just under $4 billion— that’s pretty attractive if they can execute,” WIllemse says. “And they still own 33 per cent of the A320 program and that’s going to move to 40 per cent, and that could be a $5- or $10-billion program, again on a market cap of $4 billion. So there’s still good risk/reward in the stock right now.”

“There could be significantly higher value in the stock,” he says.