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As Bombardier rallies, investors should hold on

Bombardier's share price is rallying, the risks associated with the struggling Montreal-based company are subsiding and investors should be holding on to this stock for some time.

On Monday evening, Bombardier Inc. announced it had struck an agreement with Airbus Group SE, handing a controlling interest of Bombardier's C Series airliner program to the European-based aerospace giant.

Quibble if you want about the terms of the deal, what it means for taxpayers, Quebec jobs and Canadian ownership of the 100-150 seat planes.

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But for investors, this is good news. Very good news.

The agreement gives Bombardier access to Airbus' manufacturing know-how, which should reduce the cost to produce the planes. The agreement may also remove a U.S. trade dispute driven by Boeing Co., given that Bombardier will shift some production to an Airbus facility in Alabama.

And it gives a terrific shot of confidence to the Bombardier planes, which will surely translate into additional sales to airlines in need of smaller, fuel-efficient planes.

"We view this agreement as a game-changing endorsement of the C Series platform – one that's very likely to turn prospective customer heads around the world," Steve Hansen, an analyst at Raymond James, wrote in a note.

The question, though, is how much upside is left in Bombardier's share price?

The shares surged more than 20 per cent at the start of trading on Tuesday, sending them toward 2½ year highs, after investors began to digest the upbeat implications of the agreement with Airbus.

From the stock's recent low point in late September, when the U.S. Commerce Department slapped massive duties on C Series planes imported into the United States, Bombardier's share price has rallied more than 30 per cent.

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The bullish case for Bombardier, which I outlined late last month prior to the rally, has relied on the success of the C Series platform.

This case looked risky just three weeks ago and was based mostly on upbeat feedback on the new planes; the fact that the planes tapped into a market underserved by Airbus and Boeing; and that Bombardier was ahead of competing planes from smaller aerospace companies in Russia, China and Brazil.

Now, the bullish case looks far easier to swallow – and it's probably not built into Bombardier's current share price yet.

That's because the agreement with Airbus carries considerable uncertainty. It isn't expected to close until the end of 2018, leaving a year of questions about the health of the global economy, the reaction from airlines (Bombardier's customers) and the next move from the U.S. Commerce Department (don't expect any cheering from Boeing).

For another thing, Bombardier believes that the backing from Airbus will double the value of the C Series platform, to at least $4-billion.

Sounds good, but the benefit to shareholders isn't so simple. Chris Murray, an analyst at AltaCorp Capital, noted that Bombardier shifts from owning 62 per cent of a $2-billion platform to owning 31 per cent of a $4-billion platform. The company gets less of a bigger thing and that suggests little change, from a cash-flow perspective, in the near-term.

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It is not surprising, then, that most analysts are sticking with their previous views on the stock, even as it rallies. The consensus target price, according to Bloomberg, remained relatively unchanged on Tuesday afternoon, at $3.

That's not significantly higher than Tuesday's closing price of $2.73.

But, for longer-term investors, this near-term caution is good news. It implies that the stock still has room to rise as the uncertainties are ironed out, the questions are answered and the agreement with Airbus translates into significant orders for C Series planes.

It could be a wild ride, but it's worth hanging on.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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