Manufacturing stock does a flypast

Bombardier Inc. beat analysts’ expectations on a number of fronts in its second quarter. It bodes well for this manufacturing stock as its turns from heavy investments to ramping up production and improving operational efficiency.

Manufacturing_StockBombardier flew past analysts’ estimates for its second quarter. The company’s adjusted earnings per share for the quarter were US$0.03, versus the street’s estimate of a loss of $0.01 (all figures in US dollars unless otherwise indicated). Adjusted EBIT (earnings before interest and taxes) was $271 million, above the consensus estimate of $201 million. And the EBIT margin was 6.4 per cent, compared with the consensus projection of 4.8 per cent.

Bombardier Inc. (TSX—BBD.B) is a leader in the transportation industry, manufacturing planes and trains. It has production and engineering sites in 28 countries across four business segments: transportation (rail cars), business aircraft, commercial aircraft, and aerostructures and engineering services.

For the three months ended June 30, 2018, Bombardier made $87 million, or $0.03 a share, compared with $91 million, or $0.05 share, in the same period of 2017.

Revenues rose 2.8 per cent to $4.3 billion. The increase was largely driven by growth at transportation, where revenues rose 10.8 per cent to $2.3 billion. Transportation saw growth across all segments including rolling stock and systems, services and signaling.

EBIT margin rises

Adjusted EBIT rose 17.8 per cent to $271 million. The EBIT margin continued to improve to 6.4 per cent, up from 5.6 per cent last year. Margins were above 8.5 per cent for transportation, business aircraft, and aerostructure and engineering services.

Commercial aircraft posted an EBIT loss of $668 million. In the third quarter, the segment’s results will be deconsolidated to reflect the C Series partnership with Airbus and the Quebec government. From now on, Bombardier’s share of the segment’s earnings will be on an equity method basis.

Bombardier is making good progress with its turnaround plan. Its heavy investment cycle, which involved a lot of spending to develop the C-Series and Global high-end business jet, is now largely be hind it. The company can now focus on ramping up production and improving its operational efficiency to accelerate growth. Its second-quarter results bode well on both these fronts.

The stock trades at 35 times the $0.09 a share that Bombardier will likely earn in 2018. But, if things go well, the company could earn about $1.00 a share by the early years of next decade. The shares trade at just four times that estimate. Bombardier is a higher-risk buy for wide capital appreciation potential.

This is an edited version of an article that was originally published for subscribers in the September 14, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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