Bomber plots a course for the friendly skies

Benj Gallander and Ben Stadelmann
Friday, January 27, 2012

The travails of the past few years have offered a tremendous opportunity for investors willing to ride out stock market turbulence. In fact, so pervasive was the market beating that it has offered an opportunity to do more than a portfolio tweaking. Benj has taken advantage of this window, and the acquisition of Bombardier exemplifies this.

Bombardier was on the Stock Watch List for a good portion of the past decade. Typically, after the stock price popped, it would inevitably backtrack, again appearing as a potential opportunity. Finally, the company was purchased on December 15, the day it hit its lowest valuation since the stock market implosion of early 2009.

Yes, patience can have its virtues. And as a far more famous Benjamin stated and we like to believe, “Diligence is the mother of good luck.” Thank you, Mr. Franklin.

The Bomber appears to be a delightful addition to the President’s Portfolio at Contra the Heard, but time will tell. Benj has been doing a similar dance for the last couple of years; adding numerous companies that were badly beaten down, with the vast majority of these being dividend payers.

In fact, eight of the past 11 corporations to join the portfolio offer payouts, many of them after having had their dividends slashed, with the expectation that eventually both the payout and the stock price will return to form. While some stocks in the PP are smaller, lesser-known enterprises, recent additions such as Bank of America and General Electric fit into the household-name category.

Bombardier is in many ways a quintessential Canadian company. Based in Montreal, it was perhaps best known at one time for its Ski-Doo, which was divested in 2003. Back then, this outfit needed cash as it reeled from an onerous $12 billion debt and the post-9/11 decline in air travel. While still a large player in the sky, it is also a leader in the rail transportation sector, an arena that appears to be solid.

The company has about $2.7 billion in cash, and though the debt load remains north of $5 billion and is not light, it is reasonable relative to revenues, which should come in at about $18 billion this year. This past quarter featured earnings of $192 million and a fat backlog of $55.3 billion. However, cash-flow usage was $346 million — that’s a heap of money going out the door, which eventually must be stemmed.

One key question surrounding the future of the company is the C Series airplane. This narrow-bodied, fuel-efficient group of airplanes is designed to carry 100 to 149 passengers. Slow out of the box with sales, PrivatAir SA of Switzerland just became the 11th customer for the bird, signing a contract for $309 million, with an option to increase it to $636 million.

Yup, big money in this space.

That increases the number of firm orders for the plane to the 150 range; major airlines that have signed on include Deutsche Lufthansa AG and Korean Air. The biggest customer is Republic Airways Holdings, which operates Frontier Airlines and other regional US carriers.

Another possible problem with buying into this enterprise is the nature of the share structure, which effectively gives power to the Beaudoin family. Shareholders who aren’t kin are essentially on the outside looking in.

The Initial Sell Target for Bombardier is $6.94, a level crested in seven years since the millennium. While anticipating that this level will be achieved, the dividend that works out to about two percent will be banked. The “B” shares were acquired instead of the “A” shares because of their greater liquidity.