Bombardier Aerospace announced on March 1, 2011, the largest business aircraft sale in the company's history with a firm order from NetJets Inc. for 50 Global business jets with options for an additional 70 Global aircraft. Pictured here is Bombardier’s Global family of business aircraft with NetJets livery.
Investors are betting that a huge order for Bombardier Inc. aircraft is a signal that the long slump in the plane maker's fortunes is finally easing.
Although Bombardier is one of the world's largest manufacturers of planes, it did not count NetJets Inc. as a customer until now. The Columbus, Ohio-based firm is owned by Warren Buffett's Berkshire Hathaway Inc., and operates a fleet of more than 800 business planes, which it leases to corporate customers on a fractional basis.
NetJets' deal with Bombardier deal involves 50 firm orders and 70 optional orders, which would make the deal worth a total of more than $6.7-billion (U.S.) at list prices. Delivery is to begin in the fourth quarter of 2012. The fleet operator's decision to spend billions to bulk up its inventory of jets speaks to its confidence that the economy is in full recovery mode and will support more private aircraft.
The two companies did not say exactly how much NetJets will pay for the planes, but analysts estimate the volume is worth about one year's worth of production for Bombardier.
Investors reacted by driving up the share price of the Montreal-based company by 7.5 per cent to $6.60 on the Toronto Stock Exchange. The shares have not been able to sustain this valuation level for more than brief periods during the past eight years.
While investors are enthusiastic about improving conditions for Bombardier's aerospace unit, major hurdles remain for the company.
More than half the company's revenue comes from its transportation division, which makes railway systems. In recent years, both plane and train units have suffered from the effects of the recession. The company cut more than 4,400 jobs as the economy crashed and orders tumbled.
Revenue in Bombardier's aerospace division fell 14 per cent from a year earlier to $5.7-billion in the nine months ended Oct. 31. Revenue in its transportation division fell 10 per cent to $6.6-billion.
Bombardier faces strong competition in both the railway and aerospace markets. In the battle for railway customers, the company already faces off against Siemens AG and France's Alstom SA and may encounter even tougher competition after Mitsubishi Heavy Industries Ltd. and Hitachi Ltd. said they would co-operate to try to win more international deals.
And Bombardier has recently gone head to head with the world's two biggest aircraft players, Airbus SAS and Boeing Co., by launching its own mid-size jet, called the C-series.
Despite the challenges, support for the stock is almost unanimous among the 20 analysts who follow the company. Several bumped up their price targets after the NetJets announcement.
"While some investors might argue that huge orders … typically come with huge discounts and favourable conditions with respect to milestone payments and cancellations, we believe today's announcement sends a positive message to other potential buyers who are sitting on the sidelines," Benoit Poirier, of Desjardins Securities, wrote in a research note. "Moreover, Bombardier should be in a better position to negotiate future prices as its backlog increases."
Mr. Poirier has a "buy" rating on the stock and a price target of $8.
"We believe further orders including C-Series aircraft and new … orders at [Bombardier Transportation]are forthcoming," Chris Murray, of PI Financial Corp., wrote in a note.
He raised his 12-month target price to $7.50 from $7. The new valuation assumes a multiple of 7.5 times enterprise value divided by earnings before interest, taxes, depreciation and amortization. That's up from a multiple of 6.5.