Here's Why This Upstart Business Jet Maker Is Becoming the 'Apple of Aviation'

To profit from the extraordinary resurgence in aviation, investors are mostly ignoring the smaller aircraft makers to focus on the huge and established OEMs. Here's why that's a big mistake.
By John Persinos ,

Imagine if you had the chance to buy stock in Apple 30 years ago, when its greatest growth trajectory still stretched ahead. That's every investors dream. As the ancient Chinese philosopher Lao Tzu said: "To see things in the seed, that is genius."

Which brings us to Canada-based Bombardier (BDRBF) , a mid-sized aircraft manufacturer that's going toe-to-toe with its larger rivals Boeing and Airbus Group.

Airline passenger growth in emerging markets, combined with the need for fuel-efficient aircraft, is lifting the long-term prospects of Bombardier, an innovative aerospace manufacturer that makes smaller jets.

Bombardier already is the world's third-largest civil aircraft manufacturer, but it's aiming higher. The company is aggressively going after the burgeoning "bizjet" market (jets used by businesses), a niche that has been neglected by Boeing and Airbus. The Canadian upstart is offering its new CSeries jet, with 110-seat and 130-seat models. Competitors in this business aircraft class tend to be much smaller and wholly owned by sprawling conglomerates, such as Cessna which is a subsidiary of Textron.

And here's your buying opportunity: Bombardier stock is down nearly 73% year-to-date, in the wake of the company's request this month to the Canadian government for financial help. On Thursday, the company finally got the shot in the arm that it needed, when Quebec's pension fund agreed to buy a roughly one-third stake in the company's train and transit division for $1.5 billion.

That makes Bombardier a bargain now, while the stock is at depressed levels.

BDRBF

data by

YCharts

Airlines around the world are saddled with obsolete, fuel-hogging aircraft, an increasingly untenable burden even during this era of low energy prices. The CSeries is not only more fuel efficient, but its lightweight composite structure also lowers maintenance costs.

According to the International Air Transport Association (IATA), global airlines will invest $3.5 trillion to buy 27,800 new airplanes over the next two decades. Although the world economy remains shaky, booming passenger traffic in emerging markets is boosting demand for new airplanes, especially the smaller bizjets made by Bombardier.

Bombardier is positioned to tap into huge, long-term demand, as increasingly affluent consumers in emerging markets join the middle class and become airline passengers.

One-third of the demand for new aircraft over the next 20 years will come from Asia, which now accounts for 28% of global air passengers. Much of this demand will be for regional bizjet aircraft for feeder routes, a market segment largely ignored by the world's two largest aircraft manufacturing behemoths, Boeing and Airbus.

Emerging nations also have a need to build international and intercity transportation hubs. China alone has 40 new airports on the drawing boards. The major beneficiaries of this infrastructure spending will be low-cost air carriers, which are buying smaller planes with an eye on fuel consumption.

The best way to play this long-term aerospace cycle is with the makers of the planes, rather than the airlines themselves. Bombardier also is leveraging lower-cost labor and supply chains in developing countries.

Advanced composite materials account for nearly 50% of the CSeries aircraft, conveying a 15% lower seat-mile cost. The aircraft also is considerably quieter than other bizjets in its class.

But the CSeries is facing growing pains that are weighing on the entire company.

Bombardier reported third quarter fiscal 2015 revenue of $4.1 billion, compared to $4.9 billion for the same period last year. The company posted a net loss of $4.9 billion, or a loss per share of $2.20, due to special items mainly related to impairment charges on its CSeries, compared to earnings of $74 million, or earnings-per-share (EPS) of 3 cents.

Here's what investors are missing: Bombardier boasts a strong overall order backlog of $61.8 billion as of September 30, 2015, as customers line up for its aircraft. Unlike many beaten down stocks today, Bombardier faces every likelihood of mounting a dramatic turnaround.

After the infusion of cash announced on Thursday by the Canadian pension fund, Caisse de dépôt et placement du Québec, Bombardier will hold about $6.5 billion in cash at the end of this year -- more than enough to sustain the company while it gets its CSeries back on track. The company's production delays and cost overruns should prove temporary. Once the production snafus at Bombardier are resolved, the CSeries and the company's other bizjet models, such as the storied Learjet, should see bluer skies ahead -- and hand market-beating profits to investors who booked an early seat.

Bombardier is on the verge of a major comeback, but there's a group of terrible stocks that don't stand a chance of revival. They're on a one-way fligth path, and that's straight down. If you hold any of these equities, your portfolio is about to take a big hit. For a complete list of dangerous stocks that you should avoid, click here.

John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.

Loading ...