Friday, November 16, 2012

Bombardier Results Investor Analysis, Aircraft Deliveries Orders, Flexity Trains cs100 Jets

            Bombardier Inc (TSE:BBD.B) is a rare company in that it holds the disctinction of being both the world's largest train maker and the world's #3 manufacturer of aircraft.  The Germany-based train division dubbed Bombardier Transportation remains slightly more important to the company financially, however the gap is closing fast;  For the nine month period ended October 2011, sales of trains and related services accounted for 53% of company revenue and 59% of ebit - however during the nine month period ended September 2012 that fell to 49.8% and 54%, respectively.  Bombardier puts the blame squarely on European demand (lower activity/contracts reaching completion not being filled by as many new ones) which it says accounts for 88% of the decline in rail car sales (9-month period). 

I'm still optimistic about the Transportation division !  In China and Russia, demand for trains developed by Bombardier will inevitably go up due to key license agreements signed with major rail equipment companies in China (CSR Puzhen) and Russia (manufacturer Uralvagonzavod).  As well, business from North America is on the upswing which bodes well for Bombardier - 3Q revenue from North American customers was $373m (+17.7%) and $1,095m (+7.0%) in the nine month period.  Also, revenue from Asia-Pacific which was down considerably during the first two quarters, recovered strongly in the third when it increased by +31.3% qoq (still down -42.9% in 9M2012 but that's due to uncharacteristically low sales in the first two quarters).  Total company backlog as of September 2012 is $58.6 billion up +8.7% or $4.7 billion in just the last nine months:  44.5% aerospace, 55.5% trains.

Aircraft revenue is stable, which is a great sign considering more than $200 million worth of aircraft deliveries was postponed until the fourth quarter.  The postponement of the CS100 first flight by half a year (Jan 2013 to June 2013) is discouraging but nothing to be too concerned about;  The two larger aircraft manufacturerers, Boeing (787 Dreamliner) and Airbus (Airbus A380) ended up releasing their latest larger models three years behind schedule --> Bombardier's 100-149 passenger CSeries planes will compete directly with the Airbus A320 and Boeing 737.

The company remains a force in the manufacturing industry.  Its customer base remains diverse (Saudi Arabia was the biggest rail customer this quarter), it keeps innovating (Learjet 70 and 75 programs launched in May 2012, continuance of Learjet 40 and 45) and getting its jets certified in key geographic regions which gives it a competitive advantage (in June 2012 awarded aircraft type certification for the Q400 aircraft for operation in Russia).  There's also the well known fact that Bombardier's new planes are lighter and 20% more efficient on fuel.

Net profit remains stable and orders keep coming in !  
There are a few reasons why I think the stock price is lower than it should be, one of which begs the questions:  Will Bombardier postpone yet again the release of the CS100 planes ?  Latest delay led to a -3.9% decline in price on the day of the announcement.  Remember, that was the same day the company announced the closing of a rail plant in Germany and the release of 1,200 of its 70,000 global employees - Keep in mind that equipment suppliers are causing the delay not product development.   I consider the job cuts to be indicative of a European problem, not a global one - Last quarter showed growth in rail car demand in both North America (+17.7%) and Asia (+31.1%).  Economic growth throughout Europe remains stagnant and that's affecting European demand for Bombardier rail cars (-20.65% in 9m2012, -16.4% in 3q2012), so the termination of 3.3% of its Transportation workforce there (1200/36000) shouldn't surprise anyone.
Embraer pays NO dividend and earns only a fraction as much as Bombardier (31.1% as much last quarter) but today there's only a 9.6% difference in market capitalization between the two companies ($4.79 vs $5.25 billion)!!  WHY ??
Yes, until 2013 when Bombardier finally delivers the first CS100 planes, it will have a relatively high liquidity ratio (BBD.B is investing $3.3B to develop the CSeries) forcing ratings agencies S&P (BB+ to BB) and Moody's (SSGl-2 TO SSGL-3) to downgrade it.   But I think that, when you take into account the growing popularity of its more pricier Global series jets and the fact that long term debt only went up by +9.0% since December even though Bombardier spent 38.4% more on product developement (aerospace), the company appears to be moving along fine.

Bombardier Aerospace

Aerospace backlog of $26.1 billion as of Sept 30, 2012 (up from $22.0b in December) $0.6 billion of which is military aviation training.  Backlog is at record levels thanks to a multi billion dollar order placed by NetJets last June;  The order involves more than 100 Challenger and Global families aircraft valued at $2.6 billion (firm order for 75 of the 300 series, 25 of the 605 series).  In the 3Q2012 19 more firm orders were placed for Global 6000 and 8000 aircraft ($1.2 billion).  For the nine month period ending September 30, 2012, Canada's Westjet Airlines placed the largest commercial jets order (firm+options = >$1.5 billion) followed by Indonesia's Garuda (firm+options = $1.2 billion).  Canada's Chorus aviation was also one of the top customers, ordering 6 planes for $189 million.

Influencing Factors

-As of Sept 2012 pre owned business jets available for sale represent only 13.3% of the total inservice fleet, down from 13.6% in Dec (which is a good sign). 

-Business jet usage in the United States (similar level as in 3 of 4 previous quarters) and Europe (highest quarterly level since Q3 of 2011 which was 4.6% higher) remains strong which is indicative of a healthy market. 
-Globally- For the nine months ended Sept 2012 commerical airlines worldwide reported load factors of 78.4% for domestic travel (down from 78.8% in 2011) and 80.9% for international travel (up from 79.6% in 2011). (source: Air Transport Market Analysis Report).  In July 2012 domestic and international travel had identical load factors (83%), the best month for either segment during the last year.

-Domestic air travel:  largest gains were in China, Brazil.  International Air Travel:  Biggest increases were in Africa, the Middle East and Latin America.  China also had the highest domestic load factors (percent of seats occupied during travel).

Maiden flight of CS100 aircraft delayed until June 2013 (as recently as last August Bombardier said it would be end of 2012).  Delay is due to problem with suppliers.  Entry into service will happen one year after first flight (summer 2014).    Timeline for CS300 remains the same (2014).
The services Bombardier provides include aircraft maintenance, commercial and military aviation training.  About a fifth of Bombardier's revenue comes from the services it provides.

3 months ended September 30, 2012 : 57 aircraft deliveries (86 last year), 83 net orders (34 last year)9 months : 153 aircraft deliveries (182 last year), 192 aircraft orders (202 last year)

Bombardier Aerospace Statistics

mil US$
three months nine months
revenue Sept.30,2012 Oct.31,2011 change Sept.30,2012 Oct.31,2011 change
business class 1243 1103 +12.7% 3142 3064 +2.5%
(# deliveries) 44 43 +1 119 115 +4
commercial 257 526 -51.1% 740 1480 -50.0%
(# deliveries) 12 24 -12 34 67 -33
other 134 136 -1.5% 388 403 -3.7%
(# amphibious
1 1 0 3 3 0
services 404 410 -1.5% 1260 1240 +1.6%
229 130 +76.2% 501 391 +28.1%
total revenue 2267 2305 -1.6% 6031 6578 -8.3%
costs-sales (1972) (1978) -0.3% (5164) (5638) -8.4%
gross profit 295 327 -9.8% 867 940 -7.8%
R&D (37) (38) -2.6% (103) (95) +8.4%
S&G less o/inc (135) (160) -1.6% (448) (470) -4.7%
ammortization 59 57 +3.5% 167 156 +7.0%
ebitda 182 186 -2.1% 483 531 -9.0%
ebit 123 129 -4.6% 316 375 -18.7%
As you can see from the data, commercial aircraft deliveries were lower by a significant margin (about half in both the 3 month and 9 month periods) but some of that is due to deliveries being pushed to the next quarter. The total impact on revenue by commercial aircraft performance is -$269 million. However, that was offset by a greater volume of deliveries in the large higher priced business jet class --> +$140 million. Total manufacturing revenue, however for the quarter was down -$131M versus 3q2011. For the nine month period the same factors combined to produce a net effect on revenues of -$677 million.
Improved sales of pre-owned aircraft pushed other revenue up by +$99m in the quarter, +$110m year to date.

EBIT was impacted by higher cost of sales per aircraft (materials were more expensive).

Product Development: 3Q: $467 million (+43.7%) 9Mo: $1,236 million (+38.4%) investment is related to the CSeries, Learjet 85, Global Families 7000 and 8000. Product retooling involving the recently launched Learjet 70 and Learjet 75 programs (May 2012). The Learjet 75 replaces the Learjet 45 XR; changes were made to the interior, cabin system, flight deck and engine.

Bombardier Transportation Division - Trains

mil US$
three months nine months
revenue Sept.30,2012 Oct.31,2011 change Sept.30,2012 Oct.31,2011 change
rail vehicles 1382 1573 -12.1% 3985 5323 -25.1%
services 332 387 -14.2% 1043 1043 na
systems 357 358 -0.3% 954 1087 -12.2%
total revenue 2071 2318 -10.7% 5982 7483 -20.0%
costs-sales (1738) (1908) -8.9% (4976) (6205) -19.8%
gross profit 333 410 -23.1% 1006 1248 -24.0%
R&D (32) (36) -11.1% (93) (101) -7.9%
S&G less o/inc (176) (202) -14.8% (602) (613) -1.8%
ammortization 31 36 -13.9% 95 102 -6.9%
ebitda 156 208 -25.0% 462 636 -27.4%
ebit 125 172 -27.3% 367 534 -31.3%

September 2012 order backlog $32.5 billion (+1.8% since Dec). $2.3b worth of new orders (+43.75% versus 3Q2011). Weaker EBIT (6.0% vs 7.4%) and EBITDA (7.5% vs 9.0%) ratios.

Sales driven by demand from
Saudi Arabia - 36 high speed trains worth $369 million
USA - 10 year deal with New York, New Jersey port authority for maintenance and upgrading of systems, valued at $243 million
China - High speed trains contract changed. Value remains at $4.0 billion. Also in China, Bombardier signed a license agreement in July which will boost sales there.
Russia - Joint agreement with Uralvagonzavod to make and sell trams to be used in Moscow.
Switzerland - 60 Flexity trams worth $241 million

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