TD UpgradeQ3/18 Preview and Upgrade to SPEC BUY on Share-price Weakness $5.00 Target
Event Bombardier will report Q3/18 results on November 8. Due to the 43% share-price decline from its recent high and the 56% return to our unchanged target price, we are upgrading Bombardier to SPECULATIVE BUY from Hold.
Impact: NEUTRAL We forecast that Bombardier will report a 28% y/y increase in Q3/18 EBITDA to $300 million versus consensus of $326 million. The growth is due to improving profitability in Transportation and the impact of eliminating 50% of the CSeries/A220 losses due to the sale to Airbus on July 1, 2018. We have made immaterial revisions to our Bombardier forecasts. Our view of the long-term value potential remains unchanged. Although we believe that the valuation offers upside potential over a 12- month period, investors should be aware that Bombardier's short-term share-price direction is particularly sensitive to catalysts which are difficult to predict. As a result, our conviction in the short-term direction of the share price remains limited.
Business Aircraft accounts for 41% of our target. We believe that business aircraft demand is improving, as demonstrated by a number of industry indicators, most importantly OEM book-to-bills above 1x. We forecast that the Business Aircraft segment revenue will increase at a 25% CAGR from 2018-2020, while industry growth averages approximately 8-10%.
Transportation accounts for 35% of our target. We forecast that Transportation EBIT will grow consistently into the next decade due to its limited sensitivity to economic cycles and the numerous efficiency initiatives being implemented. We believe that the potential for Bombardier to buy back the 27.5% interest in Transportation owned by CDPQ could represent $0.15-0.57/share in upside potential to our current target.
Commercial Aircraft accounts for 13% of our target. Although we remain cautious regarding Bombardier's commercial market-share trends, its relevance to financial results is limited, and we believe that new orders could still be a catalyst for the stock.
TD Investment Conclusion We believe that management is successfully executing its strategic plans and that long-term upside potential beyond 12 months exists. We believe that the recent share-price weakness has appropriately discounted aerospace backlog trends over the past several years and balance-sheet risk; we now believe that the current valuation represents a compelling investment opportunity