Risks and Value in This Aerospace Manufacturer

Thanks to a combination of a recovering economy, more profitable airlines, and growth in emerging markets, aerospace manufacturers have been raking in orders over the past year. Boeing (NYSE: BA  ) and Airbus Group (NASDAQOTH: EADSY  ) are the two largest commercial aerospace manufacturers and have seen their share prices both rise around 80% as airlines and aircraft leasing companies around the world look to expand and modernize fleets.

But one smaller player still trades at a lower valuation and has the potential to share in the same growth as Boeing and Airbus.

Canadian aerospace
Bombardier
(TSX: BBD.B  ) (NASDAQOTH: BDRBF  ) works in the manufacturing of both planes and trains. Breaking down the aircraft segment further, Bombardier manufacturers private jets under Learjet, Global, and Challenger, as well as the Canadair regional jets that have become ubiquitous in regional airline fleets.

Growing ambitions
But Bombardier's latest project moves the company into a larger size class and begins to disrupt the Boeing-Airbus duopoly. Bombardier's newest model, the C Series, is being offered in two models: A 110 seat CS100 and a 135 seat CS300. With the Boeing 737 and Airbus A320 families originating decades ago, the C Series is the latest all-new frame in this market segment; a fact Bombardier stresses as airlines modernize fleets.

Bombardier has set high goals for the C Series program estimating airlines will buy nearly 7,000 100-150 passenger planes over the next two decades of which Bombardier will be able to secure half the orders. Furthermore, the manufacturer expects another $5 billion to $8 billion in annual revenue once the C Series program is up and running.

Risks
Investing in Bombardier has very much become an investment in the C Series, considering the vast resources the manufacturer has poured into the plane. Originally, targets were to have a $3.4 billion development budget but these costs rose by another $500 million. In addition, engineering resources have been largely spent on the C Series rather than an overhaul of Bombardier's regional jet line. With Embraer (NYSE: ERJ  ) launching a new series of E-Jets, Bombardier could be forced to sell its CRJs at a greater discount than if it had launched a new updated regional jet.

The C Series order book has failed to impress so far with only 182 firm orders, well short of the company's 300 firm order target by launch. If the C Series cannot deliver more orders, Bombardier could be forced to sell the planes at a greater discount thus reducing margins and earnings. On the bright side, many more options to purchase C Series aircraft have been issued and, if exercised, could move Bombardier over its target. The manufacturer is also reportedly in talks with Air Canada about a C Series order that could help to strengthen the order book.

Value
With the rallies seen in Boeing and Airbus, both aerospace giants are trading around 20 times earnings on expectations of strong future growth. While I believe this valuation is appropriate for these companies based on their stability and growth potential, investors that believe Bombardier can successfully execute on the C Series project can have Bombardier shares for closer to 12 times earnings.

Bombardier shares could also have more room left to run considering shares were up around 20% over the past year, far less than the 80% gains at Boeing and Airbus. But to see Bombardier as a value play, you need to have confidence in the success of the C Series to drive the company's growth.

Buying aerospace
Airlines need planes and the latest boost in airline profits has led carriers worldwide to place big orders to modernize fleets. While Boeing and Airbus were big movers in 2013, Bombardier lagged behind because of the uncertainty surrounding the C Series. With Bombardier's comparatively lower valuation, investors who believe in Bombardier's ability to execute the C Series have the opportunity to invest in aerospace manufacturing at a better value.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 31, 2014, at 3:24 PM, GaryDMN wrote:

    Bombardier is significantly different from the others, as it is also the world leader in passenger trains and trams. They also have an international manufacturing base that even extends to China. Expect to see many joint manufacturing partners of their plains, like they have for trains, extend across the globe.

  • Report this Comment On March 31, 2014, at 6:53 PM, emilyrobins wrote:

    The aerospace and defense industry has outperformed other industries fiscal year 2013. http://j.mp/five-aerospace-and-defense-companies

  • Report this Comment On March 31, 2014, at 8:03 PM, Kelly15 wrote:

    Aerospace and Defense has been one of the leading industries year to date in terms of average stock performance

  • Report this Comment On March 31, 2014, at 8:08 PM, JhonAndro wrote:

    The top five performers of Aerospace industry in terms of year to date stock performance include: The Boeing Company, Northrop Grumman Corporation, Lockheed Martin, Raytheon Corporation, and United Technologies Corporation.

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