Gulfstream Reports Strong Aerospace ( Backlog Growth)From TD: Flash report
GD Reports Strong Aerospace (Gulfstream) Backlog Growth
Event
General Dynamics (GD) reported Q1/22 results this morning. GD owns business jet OEM Gulfstream which accounts for the majority of its Aerospace segment. The Q1/22 Aerospace segment book-to-bill was impressive at 1.7x.
Impact: SLIGHTLY POSITIVE read-throughs for Bombardier
While Bombardier's share price has declined significantly from 2021 highs, the backdrop for the business jet cycle has shown no real signs of cracking and, in our view, is proving to be stronger than we had anticipated even 12 months ago. Clearly concerns over supply chain challenges, which have not had a material impact on Bombardier to-date, inflation, and more recently, Alstom's request for arbitration over claims relating to its purchase of Bombardier's Transportation operations in 2021, are weighing on the share price. This environment could result in prolonged pressure on Bombardier's trading multiples despite the strong fundamental outlook for the cycle and Bombardier's turnaround initiative. However, we believe news such as that from GD (Gulfstream) this morning should provide support to the stock and reinforce our long-term view of the upside potential in Bombardier's share price.
At the time of its Q4/21 report (no update available at this time), GD was expecting 2024 business aircraft deliveries that imply a CAGR of 13% from 2021. This compares to our 10% CAGR (excl. light jets) estimate for Bombardier through 2024, and the company's last guidance of approximately 5% through 2025. We believe that there is upside to Bombardier's guidance, but view the company's conservative target as a prudent approach to managing investor expectations in the current environment.
Bombardier has demonstrated early success in executing on its turnaround strategy, having exceeded its 2021 guidance. We believe that each successive quarter of delivering on financial targets will draw attention to the significant share price upside should Bombardier remain on-track to achieve its 2022 and 2025 targets. We acknowledge that factors negatively impacting sentiment towards the broader aerospace and defence sector and the recent Alstom development could weigh on Bombardier's valuation in the short-to-medium term, but believe that Bombardier's debt profile and cyclical strength will eventually lead to upside for shareholders.