Bombardier looks good to Genuity Capital Markets

With one Wellington Financial Fund III investment in the aerospace sector, we pay close attention to what is up with Bombardier (BBD.B:TSX). This equity research report from Genuity Capital Markets is surprisingly positive, and serves as a straw in the wind of a 2010 economic recovery:

“Investment Thesis

· Initiating with a BUY on valuation. We believe investors have discounted Bombardier (BBD) shares too much for the expected aerospace slowdown. BBD trades at only 6.9x our trough F11 EPS estimate, which is 3.8x lower than BBD’s average trading multiple in the past three years. We believe positive performance metrics from BBD, or brighter economic or industry conditions could produce substantial share price gains.

· Substantial mid-term upside. We estimate BBD’s EPS potential at roughly $0.75, implying share price upside to the C$9.50/share or better range over the next two to three years. EPS drivers should include rebounding/growing sales and significant margin expansion potential in BBD’s Aerospace segment.

· BBD Aerospace (BA) business likely to drag on results through F2011. Business jet (bizjet) deliveries are likely to tumble due to the weak economy. The regional airliner business is fighting headwinds too, although this segment is less than 15% of the company now. We are projecting BA EPS to decline from $0.35 in F2009 to $0.20 in F2011.

· Strong upside potential for BA beyond F2011. BA demand should eventually rebound, and management is targeting substantial margin improvement, building on top of the recently completed margin increase program. BA EBIT margins increased to 8.5% in the last 12 months, up from 4.1% in F2005. Management is now targeting 12% by F2013. We estimate that BA will earn roughly $0.53 EPS in F2013 at the target margin, up from $0.35 in F2009.

· BBD Transportation (BT) should deliver solid $0.20 or more EPS. BT should benefit from a very large, very solid backlog and continued global rail infrastructure spending. We believe BT roughly supports the current share price alone.

· Strong balance sheet. BBD is currently in a net cash position.”

Question: why do PMs call it the “bomber”? I’ve never understood that. As in the guy in a B-17 bomber who does the targeting? I don’t think he was termed “the bomber”.

MRM