Stay away from Boeing and Bombardier, this investor says

Times are tough for US aerospace company Boeing (Boeing Stock Quote, Chart, News NYSE:BA) but it’s not much better north of the border for Canadian plane maker Bombardier (Bombardier Stock Quote, Chart, News TSX:BBD.B), which has performed miserably of late. There’s a dual problem with Bombardier, says John O’Connell of Davis Rea, since not only is it very tough to succeed in planes and trains but Bombardier’s management has been consistently awful at it.

Bombardier’s share price took a nose dive last week on release of preliminary quarterly financials which featured lowered guidance from management on ballooning production costs and delays associated with its rail business. Meanwhile, the company has suggested that selling off its remaining airplane segment could help in lowering Bombardier’s huge debt load, a concern that has weighed heavily on the company for years now.

Saying that addressing its debt issues represents the “final step” in Bombardier’s multi-year turnaround, CEO Alain Bellemaire held out the severing of its partnership with Airbus as another in a line a cost-saving measures.

Bombardier’s share price has been a disappointment for a while now and has sunk to a little over $1.00 per share.

The news for Boeing is no better, as the company recently announced the shutdown of its 737 Max production line as newer issues concerning its software have emerged, stretching the resumption of deliveries already further than had been expected, as the plane’s grounding in response to two fatal crashes continues.

Over 2019 and for the first time in its history, Boeing had more cancellations than new orders for planes, while the company’s stock has dropped 28 per cent over the past ten months.

O’Connell, chairman and CEO of Davis Rea Investment Counsel, said it’s unclear why Boeing’s share price hasn’t been treated more severely.

“I’m surprised it hasn’t taken more of a hit,” said O’Connell, in conversation with BNN Bloomberg on Monday. “The 787 plane that they developed, the profitability on that plane is pretty poor. The 737 Max was developed because they were falling behind Airbus, and clearly they thought that they could do an upgrade without spending the $10 billion it would likely take to develop a mid-market plane like the 737.”

“It’s going to end up costing them probably $13 billion and a lot of reputational damage and probably a loss of market share,” he said. “They have the defense business which I think is attractive, but I think that if you want to own an airplane manufacturer I think Airbus is probably the better way to go around.”

O’Connell said Bombardier’s difficulties, on the other hand, go way back and deep.

“Aircraft manufacturing is a very difficult business. It’s hugely capital intensive,” he said. “[For Bombardier], in the train component of the business, you have to manufacture those trains in the places where you want to sell them so there’s no efficiency and there’s huge government subsidies — it just makes for bad businesses.”

“You don’t need to try to guess the bottom in bad businesses,” O’Connell said. “This management team at Bombardier have never been straight shooters as far as I’m concerned, and with dual-class structures it’s difficult.”