Bombardier's new CSeries will add lots of value to company, says analyst

By Ross Marowits, The Canadian Press

MONTREAL - Growing confidence in Bombardier's (TSX: BBD-B.TO) new CSeries aircraft has prompted an aerospace analyst to become the first to incorporate its potential value in his target price for the company's stock.

Benoit Poirier of Desjardins Securities estimates the new 110-to 149-seat plane that is set to enter service in 2013 will be worth $1.20 per share for the company, raising its market capitalization by more than $2 billion a year. As a consequence, he has raised his target price for Bombardier shares to $7 from $6.

After visiting an aircraft facility in Montreal with institutional clients, Poirier said they were impressed with the program's development.

"We continue to believe that the timing of the CSeries is advantageous to Bombardier and that the program will create value for the company," he wrote in a report.

"We are aware that risk still surrounds the CSeries, but we have sufficient confidence in the program to justify adding its estimated value to our target price."

Bombardier said it is confident that negotiations with a dozen carriers will translate into one to two new orders by the end of January.

So far, it has only received two firm orders for a total of 50 aircraft.

Poirier said conditions are promising for the airplane and "it should be relatively easy to line up potential customers." Orders should accelerate in 2011 when the economy picks up and passenger traffic recovers, he added.

Among those rumoured to be interested in the plane are AirTran, Avianca Airlines, Air Canada (TSX: AC-B.TO), Qatar Airways, International Lease Finance Corp., Delta/Northwest, American Airlines, China Southern Airlines, Shanghai Airlines, Eznis Airways and Lessor Hong Kong Aviation Co., he said.

He estimates that 1,200 aircraft in service around the world are prime candidates to be replaced by the CSeries in the next few years.

One major reason is the fuel inefficiency of the aircraft, which have an average life expectancy of 15 to 20 years.

Bombardier has estimated it will capture half of the global market for 6,300 aircraft over 20 years. Poirier assumed a 25 per cent market share, excluding the possibility the company may stretch the airplane to add more seats and increase its appeal.

Although the market remains challenged, a gradual improvement in financing availability has given Poirier enough confidence to include the CSeries contribution in his price target, he added.

The assessment comes amid some skepticism about Bombardier's foray into a market segment dominated by Boeing and Airbus.

Boeing has said it will defend its share of the lucrative single-aisle passenger airplane, but neither it nor Airbus is expected to introduce a newly designed plane before 2020.

Industry observers have suggested the manufacturers may elect instead to refine their offerings and change engines to produce operating savings.

Qatar Airways CEO Akbar al-Baker recently suggested adding a geared turbofan engine to the Airbus A320 would give it a 10-year jump start on the competition and kill the CSeries program.

Bombardier spokesman Marc Duchesne said potential customers have been very positive about the plane.

"Airlines to whom we are talking are absolutely aware that this aircraft will provide them the right solutions for their future needs, that's for sure," he said.

While other analysts generally concur on the value of the plane, they haven't yet incorporated them into their valuations because it will be years before it generates revenues and earnings.

Chris Murray of CIBC World Markets said he hasn't yet built it into his numbers because it falls outside his 18 to 24 months forecast period.

"I still think it's a good program to do. Strategically it makes a lot of sense to them, it gives them a growth path for their current regional jet customers," he said.

However, Murray said Bombardier needs to boost its order intake to silence critics.

"Definitely I would feel much more comfortable if they had more orders."

Bombardier Aerospace is the world's third-largest airplane manufacturer but has concentrated on regional jets and turboprop planes designed to carry fewer than 100 passengers as well as corporate and executive jets used by companies and wealthy individuals.

The company is also one of the world's leading suppliers of commuter trains, subway equipment and other rail mass transit vehicles through its Transportation division.

On the Toronto Stock Exchange, Bombardier shares closed at $5.03, up seven cents, or 1.41 per cent in Friday trading.