Bombardier to buy the remaining 49% from
Bombardier ReportAnalysis of Bombardier:Bombardier took on its present form in 1976 when MLW-Worthington, amanufacturer of locomotives, acquired Bombardier Ltd., a manufacturer of snowtractors and snowmobiles. The company was renamed Bombardier Inc. in 1978.
Thecompany has been active ever since in the acquisitions of various aerospace andtransportation companies around the world.Nature of the BusinessBombardier conducts business in five main areas: transportationequipment, aerospace, defense, motorized consumer products, and in financial andreal estate services. The total revenues increased by 20% from $5.9 billion to$7.1 billion over the last year.
To be able to see the extent of Bombardier’s operations it is best tolook at each manufacturing group separately.AerospaceAerospace is Bombardier’s most important industry. It accounted for 47%of sales and 33% of profit in 1995 and makes Bombardier the fourth largestcivilian airplane manufacturer in the world.
Bombardier’s customers are spreadout over the globe. They range from government and private commercial airlinesto wealthy individuals and corporations in need of private jets. The productsthat are driving the growth in this division are the RJ, the Global Express, andthe Lear-45.De Havilland, which was recently purchased with help from theOntario government, produces the Dash-8 series of airplanes. The Dash-8 has hadits production rate increased to 48 planes a year with about 81 on order.Modified versions of the Dash-8 are in the works that could enable an evenbigger increase in production.
Bombardier has cut costs and increased theprofit margin at de Havilland to improve profitability. Bombardier will likelyexercise the option to buy the remaining 49% from the Ontario government. Theoutlook for the success of the RJ is very good, although most of its sales relyon a small number of companies, these companies are pleased with the RJ’sperformance to date. Bombardier’s entrant into the long-range market is theGlobal Express that has about 60 orders on the table, but needs 100 to breakeven at a price of $34 million. It is experiencing strong competition fromGulfstream, which produces a plane that is targeted for the same market as theGlobal Express. Bombardier has been successful in turning around the troubledLearjet operations and now expects Learjet to expand its aircraft productionwith the introduction of the Lear-45, which already has 90 orders on hand. TheCanadair 50 seat regional jets are continuing to be turned out at a rate of 60per year.
Overall the Aerospace industry has strong growth potential, providedthat Bombardier sticks to its successful niche marketing strategy. Bombardieris competing with some of the biggest companies in the world. Boeing, McDonnellDouglas, Lockheed Martin, and Raytheon are all counted as the opposition.Transportation EquipmentThis industry is responsible for 22% of sales and 22% of profits for1995.
The nature of this group is cyclical. Bombardier manufactures subwaycars, high speed trains, passenger cars, and a variety of other equipment, whichis primarily sold in the North American and European markets. Bombardier hasmade many acquisitions in this industry that are usually acquired at a loss.
These acquisitions along with the huge loss in the Eurotunnel contract has madeit difficult for Bombardier to show it’s real profitability in this industry.Revenues have increased by 20% since 1994. Bombardier has 28% and 12% of theNorth American and European markets respectfully. The outlook for expansion inthe North American market is encouraging with the contract with Am-Trac tosupply high-speed trains and equipment for use in the United States. Recentdevelopments in Mexico has led to an increase in demand for railway cars in thatcountry. As well, the acquisition of Waggonfabrik Talbot will give Bombardier astrong foothold in the European market that already accounts for 60% of sales.
One area of concern is that Bombardier’s competitors in this industry arebecoming stronger. The merger between Asea Brown Boveri (ABB) and Damhler-Benzhas created a strong competitor. The reemergence of Morrison Kundsen has alsoincreases the competition in this area. The fact that more and moretransportation authorities are being privatized and will need to adapt theirfleets to meet consumer preferences creates a positive outlook. To accomplishthese adaptations these companies will have to renew their 1000’s of vehicles.
Motorized Consumer Products.The biggest products in this group are the Sea-Doo and Ski-Doorecreation vehicles. This group accounted for 23% of sales and 38% of profit.High profit margins have helped Bombardier achieve success in this market.
Sales in the Sea-Doo area have increased by 20% last summer making Sea-Doo theleader in the personal water craft market. The increase in Ski-Doo’s sales hasbeen about 8% per year over the last few years giving Bombardier the number twoposition in the market behind Polaris. Other competitors in this group areArctic Cat and Brunswick. Bombardier has also recently expanded into electricvehicles marketed to closed gate communities in the southern US mainly occupiedby seniors.
The markets for personal recreation vehicles is cyclical, but thestrong economy in North America right now is helping to buoy sales. A problemon the horizon for Bombardier is that the aging demographics of its market maymean a fall in purchases in the future. DefenseDefense accounted for 6% of sales and -2% of profit.
The major productsin this group are the Starstreak missile, Shorts Missile Systems, and varioussupport services. Customers are mainly governments in the UK, US, Middle East,France, and Canada. Bombardier has seen the demand for its products in thismarket shrink over the past few years.
Efforts are being made to outsourceproduction and carry over technology from defense to civilian uses. The majorcompetitors in this market are the same as in the aerospace industry as well asLoral and Rockwell.Financial Services2% of sales and 9% of profit was contributed to this group. Bombardierdeals in three main areas. It gives loans and leases to dealers of its ownproducts and other dealers, it provides leasing and financing to its customers,and it provides financing and support for Bombardiers other divisions. Thereare really no competitors because Bombardier knows it’s own business better thananyone else. The major banks may provide some competition in areas of customerfinancing.
The success of this division depends on the successes of the othergroups.Management QualityBombardier management has acquired a very good reputation for turningaround failing businesses. Bombardier management has been able to seeopportunities and take advantage of them. The ability to turn around businesses,strong stability, strategic vision and good returns to shareholders in the pasthave displayed that the Bombardier management is, at the least, of good quality.
Ownership ControlThere are a total of 335,505,211 common shares. 88,756,982 of theseshares are Class A, which have voting rights of 10 votes each. The other246,748,229 shares are Class B with 1 vote each. The Class B shares can beconverted to Class A shares under special situations.
There are 1,236,900 cumulative, non-voting preferred shares totaling30.9 million dollars. The dividends received from these shares are either 75%of prime or 1.875%, which ever is greater.Family members of the founder, J. Armand Bombardier, some of which aremanagement own about 62% of the voting shares.Dividend PolicyThe payout ratio objective of the company is to achieve 30% of netincome as dividends.
Financial Analysis:Financial Strength (please refer to Appendix A and B for calculations)Bombardier has a total of $2,289,200,000 worth of debt and $30,900,000worth of preferred stock. The values of significant ratios are: Debt to equityof 87.4%, Total debt to Total capital of 57%, and Share holder equity to Totalcapital of 41%. These indicate that Bombardier has a significant amount of debtand any situations where additional debt might be taken on should be scrutinized.The most current bond rating comes from the CBRS in 1995 and is A-1,meaning very good quality and should have good performance throughout theeconomic cycle. Value line gives Bombardier a timeliness rating of 2, which isan above average rating.
An average rating of 3 for safety was also achieved.S&P gave the stock a rating of A-1, which is also an above average rating on thestocks past performance. These ratings show Bombardier to be a stable,dependable company without much risk associated with it. The total capital hasincreased to $4,007.5 million from $3,634.1 million in the year ending onJanuary 31, 1995.Profitability Levels (for calculations please refer to Appendix C)Net Income would have been $308.
0 Million in 1995 without the huge writeoff that was incurred in the contract with the Eurotunnel. This is a healthygain from $241.9 in the previous year. The following numbers are buoyed upbecause of the Eurotunnel write off, that should not be accounted for as it wasa special circumstance and does not help in determining the real value of thefirm. The NPM was 4.
335% and the ROTC was 16.1% in 1995. The ROE was a good18.9%.
All of these numbers are also in sink with the patterns of growth thatBombardier has experienced in past years.Growth Rates (for calculations please refer to Appendix D)The 5 year annual growth rate(from 1990 to 1995) are: 19.7% in sales,25.3% in earnings, 17.3% in dividends, and 21.
3% in EPS. The differences inearnings and EPS growth is due to the fact that the number of shares outstandinghas increased over the past 5 years. These results are over an entire economiccycle, from the recession in 1990 to the strong growth in 1995. All of thesenumbers are respectful and attest to the quality of the Bombardier company.
Theforecasted EPS used an average NPM, skipping the poor years between 1990 and1992, of 4.5% and a predicted sales of $8,359.13 million (using 5 year salesgrowth rate). The estimated EPS for the year ending Jan. 31, 1997 is $1.13.
Profit Variability(for consistency Value Line figures have been used)Referring to the Variability graph the trend lines for ROE, NPM, andSales growth can be seen. The ROE over the past ten years has been stable,except in the recession in the early 90’s, but it has since returned to pre-recession levels. The NPM has remained stable at around 4.5% over the last tenyears. The major concern is the wild variability in sales growth, which hasvaried wildly even in good times.
Quarterly earnings per share have trended higher over the last four years,with some spikes occurring in the fourth quarter of each year and dropping inthe first quarter of the next year. Based on the past trend the 4th quartershould bring an increase in earnings.Dividend Record (for calculations please refer to Appendix E)The estimated dividend is $.23, with a .959% yield, and a payout ratioof 21.7% for 1995.
Considering the trend in quarterly earnings a spike in earnings for the 4thquarter should occur. If management tries to adhere to their payout objectivean increase in dividends should occur in the 4th quarter to bring the total to23 cents for the year from the 15 cents already paid out this year.Industry ComparisonsThe preceding charts are comparing Bombardier to its competitors usingValue Line numbers but with a price as of November 28, 1996 and earningsannualized over the last four quarters. It can be seen that Bombardier has thelowest EPS, second highest P/E, second highest P/S, average NPM, averageearnings growth, and second lowest size as measured by market capitalization.
The TSE 300 has a P/E of 24.14. Bombardier’s P/E comes in under the marketvalue at 21.94 is bang on the market, but is higher than the average P/E for theindustries where it operates: Aerospace/Defense (15.7), Electrical Equipment(14.6), Recreation (15.
9).Stock Analysis:Risk ClassificationThe inherent risk in Bombardier is low and the institutional ratingservices acknowledge this (CBRS, A-1; S&P, A-; Value Line Safety, 3). The hugesize of Bombardier and the diversification also classify Bombardier as aconservative company. The appropriate market capitalization rate for Bombardieris 11% given this information, please refer to appendix F for breakdowns.
Investor PreferenceA past annual sales growth over the past 5 years of 17.5% and ValueLine’s estimated future growth of 12% over the next 5 years; as well as pastgrowth of 18% in earnings with estimated future growth of 18.5% are signs of agrowth stock. This stock has remarkable growth rates and prospects for such abig company it is a good base for a growth stock and investors should view it assuch.Stock Price VolatilityValue Line gives Bombardier a beta of .
85, which indicates a lesssensitive reaction to market fluctuations. With the phenomenal growth that weare experiencing in the TSE right now, Bombardier’s stock will not be going upas much (only 85% of the increases). Of course, beta is dead and is just areflection of past performance with no bearing on the future.
Price MomentumBombardier’s average stock price over the past ten years has beensteady. The stock has been split 2 for 1 five times in ten years. If thisprice trend continues, a price of $25 is achievable in the next year. Evenduring the recession of the recession of the early 90’s the price still grew,although at a lower rate than other years. In the long run the stock will notbe able to sustain the appreciation and there will be a correction.Stock Price SensitivityBombardier’s stock is affected by the level of interest rates. The financialservices sector is more affected by the interest rate level than the rest of thecompany.
Bombardier’s business can be affected by interest rate levels in manyways. If interest rates are high then individuals, companies, and government’smay postpone purchases to wait for lower interest rates. If interest rates arelow, like we are now experiencing, then new customers and ones who postponedpurchases because of high interest rates in the past are more willing to buyBombardier’s products.Valuation Ratios (for calculations please refer to Appendix G) All calculationsuse the price as of November 28, 1996 of $24.60 and the estimated EPS for thenext year. The valuation ratios are as follows:P/E = 21.
94P/CF = 17.63P/S= 1.078P/BV= 4.98CA/CL= 1.67RPGM= $19.31Expected Total Return = 15.
9%The DDM could not be utilized because the growth rate (14.95%) is greater thanthe discount rate (10.5%).
OpinionUsing general preferences the following results have been obtained: 1)The P/E ratio is 21.94 which is greater than 20x the current EPS overthe last 4 quarters of 20.4 (This is an upper limit for stock purchases). TheP/E is greater then the industry P/E’s of the areas it manufactures in, It isalso higher than it’s own P/E in the recent past.
The market P/E is 24.14 andmore than the P/E of Bombardier, but in an environment with low interest ratehigh P/E values are usually found, so all P/E are probably to high in thesetimes of low interest rates. P/E’s are usually preferred if they are under 15x.
2) The projected EPS of $1.12 times 25 is 28. This is greater than thecurrent P/E, which does not point to an overvaluation. 3) The P/E is overthe ROE of 18.9%. This points to an overvaluation.
4) The total returnof 14.25% is greater than the discount rate of 11%. This is a sign of a goodbuy. 5) The ROE is just over the acceptable rate of 18%. 6) TheSE/TC is .413 and is not preferred because it is under 70% 7) The P/BV of 4.
98is over the generally preferred multiple of 4x. 8) The P/CF of 17.63 isover the generally preferred multiple of 10x.
The above facts give conflicting signs of whether the stock is overvalued or not.One fact that settle the disputing evidence is that the calculated FV from theRGPM is $19.31 and is well under the current market price of $24.
60. There isno single factor that determines whether a stock is overvalued or not, but inthis case I believe that there is more evidence to support the view that thestock is overvalued. A case could be made to hold the stock if it is alreadyowned, if the shareholder feels confident in the stock, but otherwise arecommendation not to buy or to sell is given in the best interest of theinvestor for the long run.