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Trains: Bombardier back on track

Andrew Allentuck

It has been a rough three years for Bombardier Inc., arguably one of Canada's leading comeback stories. In 2001, the Montreal-based company lost badly as the effects of terrorist strikes in New York crippled airlines that buy its regional jets. Continuing problems including tight margins in its train construction business and operating losses pushed shares down by more 90 per cent from highs in 2000. What remains is a comeback story.

And a comeback it is. The company posted a 66.7-per-cent gain in its third quarter, 2007 profit. Revenue grew by 23.5 per cent to $4.2-billion (U.S.) from $3.4-billion a year earlier. Free cash flow rose to $560-million, a gain of $677-million over the same period a year earlier.

Bombardier, which is also the world's largest manufacturer of trains, subway cars and related equipment, is thriving as the world market creates demand for its business jets and enables governments to invest in infrastructure. News that a Russian company, Transmash Holdings, might make a substantial investment in Bombardier's railcar business has been taken by investors as a sign that corporate profit margins could rise. Building railway equipment is a tight margin business compared to making aircraft, says John Paul Macdonald, senior vice-president for public affairs at Bombardier's head office in Montreal.

The evidence of the company's renewed health has not escape the attention of stock pickers and market forecasters. Pat McKeough, a portfolio manager and publisher of market letter The Successful Investor noted in his January, 2008 issue, "Bombardier continues to win orders for its aircraft and railcars. Its total backlog is now a record $51.6-billion or just over three years' revenue. He rates Bombardier as a "buy."

There is still a long way for Bombardier to go to reclaim the stock market valuations that it had before 2001. Its stock traded north of $25 (Canadian) in 2000. Recently, shares have traded at $5.85. And the outlook is positive, for profits in both the aircraft and surface transportation businesses are rising.

"Profitability in both the rail transportation and aerospace groups has been growing due to the focus the company has maintained on operational efficiency," Mr. Macdonald says. "Rising corporate profits around the globe have increased demand for business aircraft. That has allowed prices to firm up and, together with our lengthening backlog for planes, has allowed us to generate higher free cash flow. On the rail business, the company has won more orders for equipment in a market that is thriving as governments and transportation authorities increase their budgets for trains and subway cars, signalling and operating systems."

But there are problems. Brazilian plane maker Embraer is a tough competitor in the small airliner niche that Bombardier occupies as the third largest airplane maker in the world. As well, with the rise of the Canadian dollar, the strong results that the company reports in U.S. dollars are reduced. The company hedges its position against the currency fluctuations as much as possible, Mr. Macdonald says. "But the company has felt the effects of the rise of the Canadian dollar, as all Canadian manufacturers have." The company has not restored a dividend that ended in Nov., 2004. But things are looking up for the company.

Bombardier Aerospace booked 112 net orders for business aircraft in the third quarter compared to 57 a year earlier. The company received its largest single order for its Challenger planes from U.S-.based XOJET placed a firm order for 20 jets with options for an additional 60 jets. As well, based on the Learjet aircraft design, Bombardier launched a new version. So far, the company has received 85 letters of intent for the Learjet plane.

There has been less drama in the increases in Bombardier's Transportation Division where revenues rose to $1.9-billion (U.S.) for the third quarter of 2007 compared to $1.5-billion for the same period a year earlier. But free cash flow rose to $35-million, which was a vast improvement of $177-million over the same period a year earlier. "We are going to increase margins through becoming more efficient," Mr. Macdonald said. "We are in every aspect of mass transportation and rail operating equipment. That is our strength."

Analysts note that Bombardier is a different company today than when it made such recreational products as the Ski-Doo. It sold that business in December, 2003. Today, says Miranda Hubbs, executive vice president and portfolio manager at McLean Budden Limited in Toronto, "the company is returning to profitability, margins are improving and it is participating in a global secular trend to buy more small airliners and corporate jets. Growing wealth in the Middle East and Russia has led to an increase in both personal and business travel. We are looking at a target price of $7.00 in 12 to 18 months."

Andrew Allentuck writes about investments for The Globe and Mail, and reviews books on finance for globefund.com and globeinvestor.com. He is also the author of several books.

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