Risks and Value in This Aerospace Manufacturer

New product uncertainty gives risk tolerant investors a better value in aerospace.

Jan 7, 2014 at 10:31PM

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
(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.

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.

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.

The Motley Fool's top pick for 2014
There's a huge difference between a good stock, and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Alexander MacLennan owns shares of Air Canada. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool recommends Embraer. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information