Planes Trains and Bombardier (competition)

   I talked about the jet segment before but what about trains, better known as Germany based Bombardier Transportation?

Yes, Bombardier is a top three player in the light jet segment with exactly 50% of its 2011 third quarter revenue (53% for nine month period) coming from the aerospace division ($2.3B up 27.8% from 2010) on net orders of 34 (up 48%) coupled with 68 final deliveries (up 33.3%) and a backlog of $22.3 billion (up 16%). The aerospace division relies sales of business aircraft which should be reassuring given that it's a global leader both in terms of revenue and units (43 business jets in the nine months up from 31 in 9M10). Business aircraft command relatively higher prices per unit and so that's also a key source of cash flow. By comparison, the leader in airplane deliveries, Boeing sold 127 planes (737's) for total sales of $17.7b (up 4%), earnings of $1.1b (up 31%); Only considering Bombardiers aerospace division, Boeing revenue was 7.7 times greater (profit 5 times greater) which is comparable to the market cap difference, however remember Bombardier only gets 50% of its business from planes, there's also the profitable train division from which it receives the other half of its revenue. In my opinion that makes Bombardier undervalued.
The Aerospace division is in the process of building its newest manufacturing plant in Morocco. The new plant will cost the company $200 million to build, be in construction mode for eight years but will begin manufacturing planes (and provide sub assembly capabilities) by 2013. By 2020 it will employ 850 workers.
In August 2011 Bombardier signed a deal (intent) with a major company in Russia for the sale of 10 midize CSeries aircraft for $660 million. The Russian deal may be a sign the company's larger aircraft business is about to take off or maybe I'm being too optimistic but keep in mind, the company's first 150-200 seater C919 series aircraft are on deck pending joint venture with China's Comac. January 19, 2012: PrivatAir SA becomes the eleventh company to order Bombardier's C Series planes after it entered into a contract for five 100 to 149 seater aircraft worth $309 million (and optioning another five for $327 million). The order, worth as much as $636 million brings the number of orders to 138 (262 including options) and first delivery of any of them hasn't even happened yet (end of 2012). Why are Bombardier's larger aircraft gaining popularity? Maybe it's the 20% improvement in fuel efficiency over existing planes. Lufthansa and Korean Air are two of the eleven companies with orders already placed. During Prime Minister Harper's trip to China in February 2012 it was revealed that Chinese private airline, Express Airlines is the Chinese company that purchased six 110-150 seater midsize CRJ900 NextGen planes back on October 29, 2011 for $254M. That company already uses 50 of Bombardiers older version of the model (CRJ200). The deal is significant since only about 80 Bombardier aircraft are currently in use in China. Depending on whether China Express picks up an additional five planes through an option agreement, the value of the deal could reach $491M.

Now let's look at the train segment dubbed Transportation. It is world's leading supplier in 7 of 11 product segments giving it a recognizable edge in the industry. As of October 31, 2011 the backlog is $33 billion (unchanged) or 50% more than Bombardier Aerospace not a great sign considering the difference was 75% at this time last year. Revenues of $2.3 billion in the quarter is steady with the previous period with any minor change attributable to currency effects (however in the nine month period revenue for the division is up 13%). Orders were down for the quarter and in the UK specifically, Bombardier Trains has contracted in size slightly, already beginning the process of cutting as much as half the workforce of 3,000, a plan conceived in July 2011 after failing to secure a key contract.
Part of the reason it struggled last quarter (orders down 57% in the third to $1.6 billion) is due to a controversial decision made by Britain's government in August to award a £1.4  billion contract to German company Siemens over Bombardier even though Bombardier would have built the trains at Britain's only remaining train factory in Derby (kind of ironic given that Bombardier Transportation is also based in Germany); that decision came only about two months after Germany chose Siemens over Bombardier for a £5bn contract. Another blow to the company happened the same month on July 25 when Bombardier made rail cars were involved in a massive bullet-train crash in Wenzhou that was ultimately blamed on design flaws. On the day of the crash, July 25 its stock fell 2.29% to 5.98; since then stock has fallen another 34.8% brining it down to 3.90 (by comparison Boeing stock is up 2.73% to 73.26, Embraer SA is down 15.0% to 24.95). I think investors overreacted to third quarter results, the company was banking on the contract and it wasn't really expecting to lose it given public opinion in the UK. Public opinion in Britain is continuing to pressure the government to support Bombardier's factory in Derby and really the only way for them to do that is to continue to award it key contracts which are also seen as job security for British workers. As recently as 2004 the company threatened to cut jobs at Derby but ended up not going through with it; it did however cut 7,000 jobs worldwide that year (since then the company's workforce has nearly doubled meaning the company is in a long term growth spurt).

The transportation division has strong support in India and America with new orders more recently coming from traditional customers in Chicago ($331 million order for 300 cars July 20), New Delhi ($120 million for 76 cars September 5) and Sao Paulo ($96 million order by mass transit September 21, 2011). Don't be fooled by third quarter results. During the nine month period the train division was the source of 53.1% of company revenue, $7.453 billion up 13.13% yoy with gross margin up 10.5% to $1.248 billion; That's 32.8% more than aerospace's $940 million.

Recent Good News
UK: December 28: Won a US$269 million contract to supply London South with as many as 130 Electrostar rail cars (adding to the 2,000 Electrostar models already in use there).
Germany: December 23 Receives new order worth US$648 million for 90 430 series electric trains to be used in Frankfurt. That's in addition to 87 others already ordered by DB Regio AG in 2011. The trains won't be delivered until sometime in 2014.

Over 100,000 rail vehicles presently in use around the globe, were built at a Bombardier Transportation factory. Bombardier rail equipment is designed and manufactured at 59 locations throughout the world however more than half of them are in Europe where 73% of its 35,000 employees work in 16 nations, with most residing in Germany (research is based in Switzerland). Outside of Europe, the company employs people in Canada (Ontario/Quebec), Australia, United States, and Mexico where Bombardier's newest Learjet plant was built. There's also India and China giving it a presence in Asia. In China the company has train and large commercial jet partnerships with local companies including newly formed Comac. For trains, Bombardier has three joint ventures and seven 100% enterprises in China, under which it manufactures propulsion equipment and signaling equipment. 13% of transportation 2011 fiscal revenue came from Asia. China is the focal point for Bombardier's future in the region which isn't a bad plan considering China plans to spend $434 billion on railway infrastructure between 2011 and 2015, that figure is the latest and is 41% higher than the previous one.

Bombarder remains a solid company in which to invest. It pays a dividend which has gone up every year for the past three years. The dividend has gone up from nothing in 2008 to 10 cents a share annualized in 2010 and is on track to reach 11.5 cents in 2011

Gold Prices, Eurozone Bond Sales (commodities weaker on strong US dollar, market selloff but long term fundamentals remain strong, Italy bond rates double in just one month)

Interesting Fact: 12% of the world's gold is produced at mines dug by individuals without advanced digging equipment. A lot of those mines are in countries like Mali and Somalia.
So far in 2011 silver's popularity has gone up while gold's has decreased slightly, at least according to sales reports by the US Mint. Between January and end of November 2011 the US Mint sold 37,859,500 ounces of silver (up 15.11% from 32,890,500 oz in 2010) and 934,500 ounces of gold (down 19.5% from 1,160,500 oz in 2010). In fact on October 1st it was rumoured that upwards of 737 thousand of silver ounces were purchased from the US mint, a one day record. If true that would amount to 42% of all silver purchased during the month of December 2010 and 24% of the three million ounces sold in October. Since the US moved towards a weak dollar policy in 2002 silver has tacked on about 500% of its present value which is still about 20% under its 200 day average. 2012 update France's credit rating was lowered to AA from AAA by Standard and Poor's. That's a bad position for the country to be in considering it recorded zero gdp growth during the year and given previous statements by Sarkozy as recently as October when he said he would do everything he could to keep France from being downgraded.

Negative Forces affecting the metals
     Over the last little while, particularly the last two weeks gold, silver and other iso traded precious metals showed vulnerability even though their long term outlook remains strong. The weaker prices are due in part to a stronger US dollar (equity markets weak driven lower by the strong dollar which negatively affects foreign investment, EU sovereign debt uncertainty causes US dollar to gain). The ECB's reluctance to purchase the soveriegn debt of Italy and Spain has also been a negative factor (ECB has been under pressure from Germany to refrain from handing out blank cheques to debt laden countries citing the repercussions and how greater ECB exposure to Italy would mean more exposure for Germany, France has a different opinion and is lobbying the ECB for more support). France thinks that more ECB buying is the only way to encourage other investors to buy sovereign debt; On Friday, 10-year Italian bond yields surpassed 7% after the country's debt auctions that day showed lackluster results (Italy did sell €8B worth of 1/2 yr bonds (@ 6.5%) & another €2B in 2 year bonds (@7.8%) however the rates commanded by buyers nearly doubled from only a month ago (was 4.63% and 3.54% respectively). 7% yields in Italy puts it in the same class Greece, Ireland and Portugal were once in (though rates did get much higher for those countries before their financial collapse, the 7% rate was seen as a point of no return), this is extremely dangerous because Italy is home to the world's 3rd largest bond market after the USA and Japan (worldwide exposure to Itay is 3 times what it was to Greece) with Barclays calling Italy's situation "mathematically beyond the point of no return".
Even more disconcerting: Germany, considered the strongest of the EU economies (more manageable debt/high gdp growth) is having problems raising money in the bond market; On Wednesday Nov. 23rd Germany sold only 60% of the 10-year bonds made available. Update: With Italy's debt crisis worsening and the ECB not stepping up with more support, the IMF is reportedly preparing to loan the country $794 billion (€400-€500 billion) at an interest rate of between 4% and 5%. The loan would allow the country 1-1.5 years to reform its system and hopefully regain its solvency. It must be noted however that the IMF may be relying on a new credit facility worth just over €420 billion that was offered it in 2009 by 39 countries, to put together the money for Italy given that only two months ago the IMF only had less than €300 billion available to be loaned. (wsj:IMF Can't Rescue Europe Alone) The news pushed European Equities higher (main equities index up 3.75% on Monday). (news broke in Italy's La Stampa)

There's also bad news coming out of China - Many companies are laying off workers in the manufacturing sector and that's leading to strikes in cities like Dongguan and Shenzhen. Less import demand by Europe is causing a decline in export growth (down to 16% in October). Many of the plants use commodities like gold (1,000 people left their positions in protest recently at apple/ibm plants in Shenzhen) and silver (Foxconn makes electronic components, automotive plants - cars require catalytic converters which are the largest source of demand for platinum group metals).

Grmike's view The commodities market is entering a consolidation and deflationary period as a result of the current US debt ceiling being capped until 2013, US dollar rally, and gold and silver's post 2008 rally. The gold to silver ratio is getting very close to 60 which represents a doubling in eight months (33 in April 2011). Central banks continue not surprising since silver and gold remain fundamentally strong investments. View the lower prices as an opportunity to buy more. Poor debt sale showings in Italy, Germany and Spain mean debt may literally be insurmountable. The effect that will have on currencies will be disastrous and that will cause central banks to hoard even more gold and silver making the commodities invaluable.

What about emerging market debt? The debt crisis is making the buying of debt associated with developed nations increasingly unpopular particularly amongst international investors. So where are they going? Well, a viable alternative for the long term that's attracting interest are emerging market bonds that is, emerging market debt denominated in their local currency (debt sales in the developing world traditionally happen this way). Even a year ago when the debt crisis wasn't as widespread, US pension funds forecast their participation at over $100 billion before 2015. The only limiting factor is that in many countries including the big players China, Brazil and India the system is designed to limit foreign capital investment so not all foreign investment is allowed and when it is some countries like Brazil impose a special tax. Though still in its early stages, restrictions on them are gradually being removed and that's leading to more investment.

Last Monday's 2.5% dip in gold put the spot price below its $1,700/oz 100 day moving average, possibly an important breach considering that level had been supported for over a month (December futures contract on Comex down to $1,685.7/oz). In the week of Nov 21-26 gold fell 2.3% after falling 3.5% the prevous week. So far for November, silver declined in price by nearly 10% meaning that on the year silver hasn't gained anything. Out of all the metals with an iso trading code palladium lost the most on the week, dropping 5.9% to close at $572/oz.

Positive forces on the metals:
Gold ETF's continue hoarding, with the total weight of all gold held by ETF's recently reaching a new high of 69.978 million ounces led by the world's largest, SPDR Gold Trust.

Europe's Five Largest Utility Companies & Changes To Their Generation Capacity by fuel, Revenue, Profit (2009-2011) (EDF, EON, RWE, GDF Suez, Iberdrola), Profits Down Due to Low Electricity Prices

For the largest utility company in Europe (2nd largest in the world) (CNBC) Électricité de France (EDF), 55.5% of 2010 sales came from France compared to 57.7% the year before. EDF leads the electricity market in both France and the UK (33.2 million customers between them). Though large EDF's generating capacity relies more heavily on one fuel type (nuclear) than any of its competitors; It gets 75% of its generating capacity from nuclear energy (90% of its nuclear capacity is in France (France is the world's largest net exporter of electricity). Also of note, EDF is the world's leading operator of nuclear power and Europe's leading hydro electricity producer.

European utility stocks have been hammered lately, a direct result of earnings losses (hindering profits in Europe are low electricity prices which are expected to decrease even further in the near future (down to as low as €50 by 2015); Europe has contemplated electricity price fixing, in terms of industrial demand European countries already keep prices low so as to help their companies stay competitive, for households though it's a relatively new thing (Europe could be concerned that households can't afford further increases). Also affecting results: a warmer winter in France (GDF Suez said in its 2011 2Q report that the winter was 30.5% warmer than it was in 2010 and that was the main reason sales there dropped 8.5%/demand for gas 24% lower to 131 TWh, electricity 3% lower to 18.3 TWh). EON's stock fell 35% between January 1 and September 1, 2011 while the stock price of RWE AG (second largest German utility) fell 49%. However, revenue stream continues to be strong for most utilities but that's mostly because a number of them including GDF Suez (International Power) and Iberdrola (Elektro in Brazil (distributor) for $2.4 billion) have made significant acquisitions (also, a greater focus on renewables will benefit the companies in the long run as it makes them less dependent on natural gas imports while also removing them from carbon penalties). GDF Suez's organic ebitda growth in the first half of 2011 was -1.1% but new addition International Power was up 27% (business in America) and that boosted GDF's overall ebitda by over 8% (671m euro). According to broker data, in Germany baseload power for 2012 is at €58.95 ($84.16) per megawatt-hour. (RWE, EON May Be Long-Term Underperformers, Barclays Says)

EDF and GDF Suez also differ in terms of their international business. Most of EDF's generation capacity comes from domestic operations within France while GDF Suez receives less than 10% from France (the rest comes from places abroad like Africa/Asia and America (Canada is a significant source of wind power; about 182 MW worth in the first half of 2011). On August 9, 2011 it was announced that China Investment Corp paid €2.3 billion for a 30% interest in GDF Suez's exploration and production business. GDF Suez also produces oil, over 50M barrels in 2010. GDF Suez recently acquired 70% of International Power giving French companies a lot of control over power production in Great Britain (the other French company EDF has close to 8 million customers in the UK).

Smaller Profit Margins & Mega Refineries Force Companies Out of the Refining Business (Sunoco, Shell, PBF, Chevron), Higher Italy Bond Yield Pressures ECB to Buy More Government Bonds, Barrick Gold Makes New Discovery

&nbsp&nbsp U.S. gas station operator Sunoco (4,900 stations) officially ended its 117 year old refinery business by putting its last two refineries up for sale (335th bbl/d Philadelphia, 178th bbl/d Marcus Hook). During the last two years the refining business segment showed profit in only two quarters. The last two refineries sold by Sunoco were Ohio's 170,000 b/d Toledo refinery to PBF Energy in December 2010 (third refinery acquired by the NJ based company in 2010 for $400M ($200M cash) with an additional $125M based on future profitability). That was preceded by the sale of Tulsa, OK refinery in June 2009 to Holly Corp. for $65M. The two remaining assets are significant, in 2010 they accounted for about 40% of all refining done on the east coast of the United States.

Sunoco's exit comes amidst declining refinery profit margins (dubbed the crack spread, earnings realized from turning 3 bbls of crude into 2 bbls of gas and 1 barrel of distillate) industry-wide, stemming from higher cost imports (though cheaper shale oil from Canada is helping refineries in the midwest; 74% of gasoline pump prices come from the crude oil itself while refining costs account for about 10%). (Energy Information Administration, US Govt) Profit margins have also been affected by what Royal Dutch Shell calls 'mega refineries' in India, China, the Middle East and Japan that are designed to export. Shell is another major company that has downsized its refining business; In March 2011 it sold the 270,000 bbl/d refinery in Britian to India's Essar Energy for $1.3B, then later in April it announced the closure of its Clyde refinery in Sydney, AUS (the sale comes at a time when Shell is investing billions of dollars in the Canadian oil sands to raise production output and purchasing gas plants: two in Qatar). (Exxon, Shell use soaring profits to buy output growth) Also, BP is trying to unload its 430,000 bbl/d refinery in Texas City, Texas and another in Carson City, California while Chevron sold a 210,000 bbl/d refinery in Pembroke, UK. With the exception of a temporary rise in margins around 2005/2007 they have been in a long term decline, since at least the 1990's. (CNN: Refining more gas won't bring prices down) February 2012 update: Crack spreads are slowly recovering, they were $6.8/bbl in the fourth quarter of 2011 and a number of international refineries responded by increasing capacity. more info at Keystone pipeline rejection creates opportunity

In Canada, an increase of C$1 in the price of a barrel of crude oil raises pump prices by about 0.63 cents/liter with only 0.03 cents of that due to the GST tax (gas taxes applied also vary depending on what part of the country you're in). (March 2010: National Energy Board of Canada-Gasoline Pricing-Energy Facts) In June 2008 taxes accounted for the following proportion of pump prices in these countries: Canada 24%, USA 9.6%, Japan 34.7%, Spain 45.4%,

Greece defaulting on debt would raise EU interest rates magnifying the effects on those indirectly involved

The Bank of Canada is a debtee of financial institutions owed money by Greece and so there's concern that a ripple effect would have wider than anticipated involvement. Canadian financial institutions only have $8 billion in debt owed to them by Greece, Portugal, Spain and Ireland

that compares to $298 billion for UK, $111 billion for USA, $254 billion for France and $370 billion for Germany (Canadian institutions hold a lot of those countries debt though, for example Canadian banks own $94 billion worth of UK debt, $24 billion of French debt and $20 billion from Germany ($138B those three combined). That compares to $521B in American debt held by Canadian banks.(Globeandmail:Canada's Exposure)

Low EU interest rates have in part been a result of the assumption made that it would bailout nations within the union facing fiscal crises (the sheer size of the EU gave the impression that it was more than capable). If Greece proves to be too much to handle how then does it gain back the confidence of investors when it has yet to deal with Spain and Italy? Higher long term interest rates would be inevitable and that alone would have broad, global consequences which would make cheap credit a thing of the past.