Stock of the week: Bombardier Inc.Stock of the week: Bombardier Inc.
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Bombardier Inc. (TSX-BBD.B, $4.67) did better in fiscal 2007. Its
profit margins improved and should continue to do so. Its financial
condition is better. And its outlook is positive as a strong rise in
orders last year carried over into this year. The shares remain on buy for further gains, provided you can accept volatility and need no dividends.
In the year to Jan. 31, Bombardier's pre-tax profit totaled $359
million, or 21 cents a share, excluding one-time items (all figures in U.S. dollars). This is up by half from $238 million, or 14 cents a share, a year earlier. This year, Bombardier should earn net income of 18 cents a share, up from 14 cents a share last year.
One thing that improved Bombardier's earnings was higher profit
margins in both the aerospace and transportation businesses. In
aerospace, the profit margin (before interest and taxes) rose by more than 0.62 percentage points, to 3.91 per cent. In transportation, the profit margin rose by an even more impressive 0.85 percentage points, to 3.87 per cent.
Bombardier recognizes that it needs to further raise its profit
margins. Accordingly, over the next three years it plans to lift
aerospace's profit margin to eight per cent. Over this same time
frame, it intends to raise transportation's profit margin to six per
cent. Even if the company falls short of these targets, its profit
margins should rise.
One factor that should increase the profit margins is higher volumes
of business. This, of course, spreads fixed costs over a greater
number of planes and trains. At the start of fiscal 2008, the
aerospace order backlog was up by $2.5 billion, to $13.2 billion, from a year earlier. Similarly, the transportation order backlog jumped by $6.6 billion, to $27.5 billion.
Thanks to more orders, Bombardier plans to increase its airplane and
train deliveries this year. The upswing in orders has so far carried
over into fiscal 2008. Aerospace recently won an order for 30 CRJ900
planes from Delta Airlines. In fact, Bombardier expects the progress
in restructuring U.S. airlines will revive orders for its regional
jets. Meantime, sales of business and turboprop planes remain strong.
The transportation business recently won a $1.6 billion order for
trains from Germany.
Another plus is that Bombardier's financial condition is improving.
Last year, cash flow grew by 10.7 per cent, to $712 million. This
greatly exceeded capital spending of $218 million. In fact, the
company bought back some of its own shares. Higher cash flow also
reduced Bombardier's net debt to cash flow ratio to 1.8 times,
including invested collateral. This beats a ratio of 2.8 times at the start of last year.
In short, you should buy Bombardier for further gains, provided you
can accept volatility and need no dividend income.