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Analysis on Bombardier Inc. (BBD.B)

October 8, 2012

Overview

Bombardier Inc. (BBD) manufactures business aircraft, commercial aircraft , rail transportation equipment and systems, and is a provider of related services. BBD operates in two segments: aerospace (BA) and rail transportation (BT). Aerospace segment is engaged in the design and manufacture of business and commercial aircraft. Transportation is engaged in the design , manufacture and support of rail equipment and systems, offering passenger rail cars, locomotives, light rail vehicles and automated people movers. It also provides bogies, electric propulsion, control equipment and maintenance services, as well as complete rail transportation systems and rail control solutions.

The closing price for the stock of Bombardier Inc. as on Oct 06, 2012 is $3.83. In this analysis, we are not considering just 52 weeks history, but 5 years history as well. The purpose to consider 5 year’s history is to accommodate the lows and highs of the business cycle.

Stock Exchange Info

Bombardier Inc. is listed in Toronto Stock Exchange with ticker BBD.B. It falls under sector Industrials and industry Aerospace & Defense.

Historical Analysis

Chart 1 : 5 Years Analysis

Chart 2 : 52 Weeks Analysis

If we look at the 52 weeks pricing trend, low is $3.30 and high is $4.93.The current price is towards the lower side based on 52 weeks price range. If we look at the 5 years pricing trend, low is $2.44 and high is $8.72, the Current price is again towards the lower side based on 5 years price trend. This indicates that it is a good entry point. (See chart 1 and 2)

Table 1: High / Low Prices for BBD.B

Reason for fall / spike in the price of stock

Chart 3: Price Trend BBD.B vs TSX

Chart 4: Price Trend BBD.B vs Aerospace & Defence Industry

BBD.B is consistent with its performance. It’s quarterly results are also aligned with its past performance. Since overall Aerospace and Defense industry as well as TSX are down due to economic sluggishness, the BBD.B stock price is low. Chart 3 and 4 show the price trend of BBD.B with TSX and Aerospace and Defense Industry.

Industry info

N/A

Industry Growth

Table 2: Business & Commercial Aircraft Forecast

  • Aircrafts

Business Aircraft Forecast shows that the total fleet will be doubled by 2031 increasing from 15,200 aircrafts to 31,000 aircrafts. Total deliveries required will be 24,000 aircraft. Commercial aircrafts that forecast for 20 to 149 seat say that the required deliveries will be 12,800 seats in the coming 20 years.

  • Rail Industry

Rail Industry is rebounding in North America as well as in Europe despite the economic uncertainty. Metro contracts were awarded in New York and Sans Francisco, which represent the significant share of North American market. Also, a new demand will be arising from the emerging economies.

Volume analysis

Average daily volume is 4.2M shares, which is equivalent to $15.5M based on the current price. This means that the deals equivalent to average $15.9M complete in one day. The maximum level of $154k is suggested for the investment to keep the liquidity high.

Options Price Analysis

N/A

Valuation of the stock

Table 3: Valuation of BBD.B

BBD.B is a capital based company. Its liquidation value is NIL. Bombardier is in a long-term business and it also has a good backlog of orders in both of its segment, which indicates the consistency of net income and cash flow. Also, it mitigates the risk, arising from lower book value than the current market price. BBD.B valuation based on Net Income is $2.75 and based on free cash flow is NIL. Valuation based on free cash flow is NIL, since BBD.B spends more on capital than depreciation.

Risk / Opportunity

Risk vs. Opportunity ratio may be defined as the comparison between the strength of the opportunity and the risk involved in the investment. For BBD.B, the opportunity is 3x of the risk based on 52 weeks analysis and 4x based on 5 years analysis. (See chart 1 & 2)

Price Earnings Ratio

Price Earnings Ratio for BBD.B is lower than the Aerospace & Defense industry. This shows that there is a potential to grow in BBD to align with industry.

Dividend Yield

Dividend yield is yet another factor which an investor needs to know before investing. Generally ,a dividend paying company is considered to be a mature company in their business as it does not have any investment opportunities to grow and earn more than their cost of capital. These companies are consistently making profit. Since these companies make consistent profit and they do not have any opportunity to invest further, they distribute dividend to their shareholders. Big returns can not be expected by investing in these companies, but we are at the least risk in investing in the same.

BBD is a having a dividend yield of 2.75%.

Conclusion

It is worthwhile to invest in Bombardier Inc. (BBD.B), based on the above analysis. The value of the investment is less risky than the opportunity available.

Related Links

http://www2.bombardier.com/en/3_0/3_8/market_forecast/index.html

http://www.theglobeandmail.com/report-on-business/international-business/bombardier-riding-a-rail-revival/article4555435/

http://www.bombardier.com/en/corporate/media-centre/press-releases/details?docID=0901260d8024eb23

www.railwayinteriorsspecialreport.com/downloads/p8-9.pdf

Written By: Gulshan Malhotra

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