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 !  

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

29 too big to fail banks forced to raise cash ratio, Groupon GRPN joins Nasdaq, Unemployment lower in US but higher in Canada

Global banking regulator The Financial Stability Board on Friday November 4, 2011 released a list of 29 banks deemed "too big to fail", 8 of which are US based. Those making the list will be addressed directly by new global banking rules imposed by the G20 that will force banks to increase their cash so as to bring their cash reserves/loan ratio to a more appropriate level. The FSB is headed by bank of Canada governor Mark Carney (though none of Canada's banks made the FSB's list, appointment of Mark Carney comes at the same time Canada PM says no to European bailout support).
Dec.15 update: Fitch Ratings, a subsidiary of Paris based Fitch Group (1 of 3 credit rating agencies recognized by the US Exchange Commission (next to S&P and Moody's), downgraded 8 of the 29 banks viability ratings (the banks are dubbed GTUB's (global trading and universal banks). The banks are Bank of America, UBS, Credit Suisse, Morgan Stanley, Barclays, BNP Paribas, Goldman Sachs and Societe Generale. According to Fitch the bank's "business models are particularly sensitive to the increased challenges the financial markets face". Even though Fitch "incorporated the significant progress it sees the banks have made in building up capital and liquidity buffers to resist market challenges" it still downgraded them by one or two notches. According to Fitch "the structural aspects of their funding, earnings, and leverage, predispose GTUBs to vulnerability to market sentiment and confidence, particularly during periods of exogenous financial stress". BNP Paribas, the largest of the European banks, was also downgraded by Moody's to Aa3 on Dec.9.

The criteria required to make the list of 29 banks?
-must have exposure to more than just a couple economic sectors
-sizeable enough so that any threat posed to them will have widespread implications for the economy as a whole, that makes them eligible for government support which lowers any associated risk.
... more specifically

Financial institutions whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity. To avoid this outcome, authorities have all too frequently had no choice but to forestall the failure of such institutions through public solvency support. As underscored by this crisis, this has deleterious consequences for private incentives and for public finances.

Key definition - Loan Loss Reserves: A valuation of the good collateral a financial institution has on hand to cover bad or slow paying loans. The total value of the reserves changes with every charge-off (a loan that fails to meet its obligations - bank abandons collecting on it - it is no longer an earning asset). The provision for loan losses is an amount/allowance set aside (quarterly or annually) to boost loan loss reserves when they get too low. Note: some charge offs do recover (recovery rate), when they do they are added back to reserves. More on the world's largest banks here

Grmike's advice
-In the 4th quarter of 2011 tred cautiously with your investments in the banking sector; European Stability Fund bonds are not attracting as much investment as anticipated and banks, particularly European ones remain highly exposed. Obama says he's concerned about the debt problem.
-Invest in technology - The sector is still booming (Samsung - Galaxy smartphone, HTC new products are attracting a lot of attention) and Research In Motion countinues to be severely undervalued (Earnings to price ratio only 5.47 despite the company still having solid market share for operating systems & handheld devices as well as a growing list of subscribers (earnings may be lower but they have literally reached nil at Nokia and fell 42% for google between the last two quarters).
-Nordstrom (designer apparel) remains solid in terms of same store sales/growth, an indication that high end consumers are still shopping (in contrast with the low end where margins are being sqeezed).
-Don't forget about Bombardier - The producer of light rail/subway cars and most importantly small and large jets (most popular are the challenger and global families (combined produced 50 in the first half of 2011) but the aerospace division is most known for its Learjets (sold 19 last six months)). July backlog was $23B up 20% since the end of 2010. The Learjet 85 (in development since 2008) already has 60 orders even though the first ones won't be delivered until 2013. What's most attractive about Bombardier's stock is that even with all the upside to the company (backlog, new jets reaching first flight, strong order in rail cars, increasing market share for business jets, revenue up 18.2% in the quarter ended July 2011, net income up 48.9% qoq) its price to earnings ratio is currently 8.30 (Nov.5,2011) lower than key competitors Boeing (13.03) and Embraer SA (10.84). In the last five months of 2011 88 rail cars are scheduled to be delivered to Bombay's tram system.More on Bombardier

in other news..
Groupon joins the Nasdaq as GRPN exactly 3 years after its founding in November 2008 - The IPO was $700M the highest for a web based company since Google's 2004 $1.7B ipo. During the day it increased the number of shares by 1/6th (5M) with each priced at $20. Over the trading session shares rose by about 30% and by the end of the trading day Groupon was valued at $12.8 billion or 2.27 times (113%) more than what Google tried to buy it for in December 2010.

October jobs numbers: The United States created 80,000 jobs bringing the unemployment rate down to 9.0% from 9.1%. Canada lost 54,000 jobs (CDN dollar down about one cent versus the greenback on the day on which the report was released/2.4% loss over the week). Also affecting Canadian metrics: Insurance company Sun Life reported a quarterly loss ($621M/$1.07 per share) for the first time since 2009, on Wednesday November 2, 2011. Manulife disappointing results continue (loss of $2.4B). All of the 54,000 jobs lost in Canada are full time jobs, it pushed the unemployment rate up to 7.3% from 7.1%. Prior to October, 291,000 jobs were created over the last year in Canda. Labour numbers for Canada here

South Korea's tourism industry is thriving, the number of tourists visiting the country is up 47% in just the last five years. That compares to the 10% increase experienced by China. Most of South Korea's tourists come from China.