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Michael Babad

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Briefing highlights

  • What analysts say about hit to Bombardier
  • Markets at a glance
  • Metro in talks for Jean Coutu
  • No ‘predetermined path’ for rates: Poloz

Bombardier Inc. faces a tough go for its key C Series program in the wake of preliminary countervailing duties after losing a crucial trade spat with Boeing Co.

To recap, as The Globe and Mail's Nicolas Van Praet reports, the U.S. Department of Commerce slapped duties of about 220 per cent on C Series planes late Tuesday, ruling in the case of a sale to Delta Air Lines that Bombardier is subsidized by Canadian governments.

Bombardier called the duty "absurd," while Foreign Affairs Minister Chrystia Freeland said they are "clearly aimed at eliminating Bombardier's C Series aircraft from the U.S. market."

The Bombardier C Series 300 performs its demonstration flight during the Paris Air Show, at Le Bourget airport, north of Paris on June 15, 2015.

It was the second blow to the Canadian plane and train maker in a span of hours. As Mr. Van Praet and our European correspondent Eric Reguly writes, a deal to merge the train units of Siemens AG and Alstom SA will also put "enormous pressure" on Bombardier's train business.

The U.S. decision still has to be made final by its International Trade Commission, which is expected to rule early next year.

The "key area of concern" now is the reaction from Delta if a final ruling upholds the levy, said Royal Bank of Canada analyst Walter Spracklin.

"Moreover, the impact on other U.S.-based airlines will also be in question under such a ruling," he said in a research note.

"In the end, it is the final determination that will be the key catalyst to assessing BBD's potential to sell C Series aircraft into the U.S. market - however, we expect that in the interim period the issue will be an overhang on the shares," he added, referring to Bombardier by its stock symbol.

Bank of Montreal analyst Fadi Chamoun also questioned the final outcome, believing Bombardier still could prevail. As for the Siemens-Alstom merger, he said the deal could push Bombardier into an arrangement with another player in Europe or Asia.

"Both of these are challenging developments for BBD, but are not investment thesis-breaking, in our view," said Mr. Chamoun, who rates the stock as "outperform" with a price target of $3.30.

"The merger creates a stronger competitor in the rail market but [Bombardier's] transformation plan is designed to make the company agile and more globally competitive," he added.

"The duties could slow pace of orders, but we continue to believe that the Boeing case is likely to be rejected on the final outcome of the investigation."

The company, Mr. Chamoun said, will chase other markets, noting that this is just the "first shot" in a lengthy fight.

"Preliminary duties were expected to be unfavourable and we suspect the anti-dumping duties (expected next week) will likely add to this," he said.

"This effectively shuts BBD out of the U.S. market (one-third of addressable market). We suspect BBD will continue to aggressively pursue campaigns outside the U.S. (70 per cent of addressable market). Management continues to expect orders by year-end. Boeing will need to prove harm from the sale of the C Series aircraft in the final ruling (early 2018). The C Series has a strong reliance on U.S. suppliers, and significant support from U.S. airlines and the Canadian and U.K. governments."

Desjardins analyst Benoit Poirier, in turn, said he was surprised by the "magnitude" of the duty, adding that he believes it hurts Bombardier's marketing campaigns in the U.S.

But he added it will still be hard for Boeing to continue to "justify its case" as the process continues.

"Although we are disappointed by both decisions announced yesterday and are patiently awaiting the final determination, we maintain our bullish stance on BBD," Mr. Poirier said, holding his 12-month price target on the stock at $3.25.

"We remain confident in the company's ability to secure new C Series orders by year-end and see strong potential for the C Series outside of the U.S. market (China and Europe)."

As for the Siemens-Alstom deal, Mr. Poirier said that "could put Bombardier Transportation (BT) at a competitive disadvantage given its smaller size (2016 revenues of US$7.6-billion) although we believe there could be other M&A opportunities for BT."

Bombardier said its policy is to not comment on its stock.

Here's what other analysts are saying:

"While we expect the C Series sales campaign in the U.S. to stall here until the U.S. Department of Commerce makes a final decision, it appears the C Series is gaining traction in the rest of the world. More importantly, reports of Chinese interest in the C Series will help improve overall sentiment in the program." Kevin Chiang, CIBC World Markets

"With the lack of a credible product in the 100 to 150 seat space, including a weak (absent?) offering in the low end of the main narrow-body market, Boeing is reverting in our opinion to alternative tactics to protect its flanks. With various stakeholders including the Canadian and U.K. governments as well as several U.S. airlines showing support, this is not an issue we expect either side to roll over on. Still, this just feels like business as usual in the aerospace sector and caution investors about being too emotional on either side of the argument." Chris Murray, AltaCorp Capital

"I think [Delta] will send a signal and look closely at Airbus." Teal Group analyst Richard Aboulafia, to Reuters

"The really critical issue here is what pricing and profitability are they going to be able to achieve on the program." Cormark Securities analyst David Tyerman

"If [the ITC] can't explain how they came to that conclusion, that's really dangerous because the Canadians are going to regard this as a slap in the face." Mr. Aboulafia, to Business Insider

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