Could Bombardier Inc. Stock Hit $7 in 2016?

There’s a huge potential reward awaiting investors if Bombardier Inc. (TSX:BBD.B) can deliver in 2015.

| More on:
The Motley Fool

For Bombardier Inc. (TSX: BBD.B), the future comes down to one thing — the success of its troubled CSeries line of business jets.

The CSeries project has been one disaster after another. The company has been plagued with cost overruns, delays, and, most recently, an engine failure during a test flight. Everything turned out to be fine, but the delay cost the company precious time. Analysts have speculated that because of the engine troubles, the company won’t be able to start delivering new planes in late-2015 like it expected. This would obviously be bad news.

Investing is all about managing risk versus reward. With Bombardier, the risks are simple. If the company delays shipments of  CSeries jets yet again, not only will this shake the confidence of its customers, but it’ll also rattle the confidence of many of the company’s supporters. Neither of those is good, especially with a company that is struggling.

But these nervous investors are spending too much time focusing on the potential risks, and not enough on the reward. Just how much reward? I think the stock could soar in 2015, and maybe even hit $7 per share in 2016. Here’s why.

The scope of CSeries

While everyone else is focused on the downsides of yet another delay in shipments, the company has quietly been signing up customers. To date, Bombardier has 243 orders, with hopes to bump that up to 300 by the end of the year. Additionally, customers have the option to buy 162 more planes. Not all of these will options will be exercised, but even if 50% of customers decide to use their options, that’s a total of 81 more planes.

The company has set a price tag of $62 million for the smaller C100 aircraft, and $71 million for the larger C300. Based on the orders already on the books, the company is looking at revenue of more than $15 billion through 2017 without an option being exercised. If 50% of current options are exercised, that’s an additional $5.3 billion in revenue.

This translates into a scenario where the company gets $20 billion worth of business in just a few years. And once it actually starts delivering planes, Bombardier should see an marked improvement in selling them. Airlines don’t want to order planes just to have them delayed.

What this means for the bottom line

Currently, Bombardier enjoys operating profit margins of 5%. Let’s assume the CSeries is equally as profitable. Just how big of an impact will the new jets have on profits?

If the company can do $20 billion worth of business between 2015 and 2017, it should earn $1 billion in profits before taxes. Considering the company earned $923 million and $666 million in operating income in 2013 and 2012, respectively, the extra $1 billion in profits over a span of a few years is a really big deal. Net earnings could easily go up 50%.

Bombardier currently trades at just 11.7 times its earnings of $0.31 per share. If earnings increase 50% and the share price continues to trade at the same multiple, the stock would be worth $5.40.

I doubt that a company that has just increased its earnings by 50% would sell at a 11.7 price-to-earnings ratio. I think it would sell at more like 15 times earnings, which puts it at $6.90 per share. That’s not asking for a lot. That puts the company in line with the valuation of the overall stock market, which is a pretty conservative goal.

There’s certainly a risk that Bombardier has to push back deliveries of the CSeries line yet again. But there’s also a huge reward awaiting investors if it can manage to start deliveries on time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned.

More on Investing

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »