Friday, July 29, 2011

Train News: Canada: Rail crash means Bombardier buying opportunity

The Globe and Mail: Rail crash means Bombardier buying opportunity

Bombardier Inc. (BBD.B-T5.780.122.12%) shares were down about 4 per cent on Monday afternoon, following the weekend news that a deadly high-speed train accident in China had involved a model built by Bombardier through a joint venture. Cameron Doerksen, an analyst at National Bank Financial, thinks the selloff doesn’t make much sense, though.

For one thing, the limited details on the accident so far suggest that there was no fault with the trains involved, but rather signalling equipment or human error. While Bombardier has provided signalling equipment in China, it didn’t provide the equipment on the line where the accident occurred.

For another, China is actually a pretty small market for Bombardier at this point. Mr. Doerksen believes that less than 10 per cent of Bombardier’s transportation division revenues come from China, and that’s after factoring in the delivery of Zefiro high-speed trains in 2012. For all of Bombardier, high-speed rail accounts for less than 5 per cent of total revenue – with the bulk of sales coming from Europe.

“Even if 100 per cent of all Chinese high-speed rail-related revenue was to disappear for Bombardier (an extremely unlikely scenario), we estimate the earnings-per share impact at only $0.03,” he said in a note.

“We think the share price reaction to the potential for a slowing Chinese market for high speed rail is a major overreaction. The fundamentals for Bombardier Transportation remain robust and there is no change to our view that the division will make steady progress towards its goal of achieving 8 per cent EBIT [earnings before interest and taxes] margins. Business jet market fundamentals, which are the key driver for Bombardier Aerospace earnings growth, continue to improve while we would argue that with recently announced orders, the prospects for the CSeries have improved in recent months, not worsened.”

He is maintaining an “outperform” recommendation on the stock, along with a price target of $8.50.

Keep in mind, though, that Bombardier shares had already hit a soft patch well before the Chinese train crash. So far in July, the shares have fallen about 16 per cent, likely over a combination of concerns about rising competition from Boeing Co. (BA-N70.47-0.19-0.27%) and a softer global economy.

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