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Are Bombardier Shares Still a Buy?

Last week wasn’t a whole lot of fun for Bombardier (TSX: BBD.B) shareholders.

Early in the week, Air Canada (TSX: AC.B) announced that it was choosing to retrofit its fleet of 25 Embraer jets rather than order new CSeries jets from Bombardier. This order was widely expected to be a slam dunk from Bombardier’s point of view, since it has a long and close partnership with Canada’s largest airline. The order is still expected at some point in the future, but the nature of the industry means it could be easily be past 2020 before Air Canada gets new Bombardier aircraft.

Then, in the middle of the week, management from Republic Airways (NYSE: RJET) told investors that it planned to use smaller Embraer jets and Bombardier turboprop planes in its fleet. There was no mention of Bombardier’s CSeries aircraft, even though Republic and Bombardier have signed an agreement for 40 of those planes. Republic hasn’t come out publicly about canceling its order, but clearly management is having second thoughts.

And finally, late in the week, Russia’s industry minister openly considered canceling the partnership between his government and the company. In exchange for opening a plant and constructing planes in a special economic zone 900 kilometers southeast of Moscow, the Russian government agreed to buy 100 Q400 turboprop planes, for a value of $3.4 billion. Moscow’s second thoughts appear to be partially motivated by the Canadian government’s very vocal opposition to its involvement in the Ukraine.

If you combine this latest bad news with the company’s announcement earlier in the year that delivery of the CSeries line of aircraft would be delayed at least six months to the latter half of 2015, it’s little wonder why shares in the company have shed almost 20% of their value so far in 2014.

An attractive entry point?

Even after all that bad news, there’s still a bull case to be made for the stock.

One of the reasons Republic Airways has not moved to cancel its more than $3 billion order for Bombardier’s CSeries jets is because it believes it can sell that contract to another airline for a profit. Republic’s order is one of the first that will go into production, meaning if Bombardier can maintain its current schedule, the company should take delivery of the aircraft in late 2015 or early 2016. For an airline that needs jets soon, Republic has an interesting asset.

As for the Russian situation, analysts believe all this sabre-rattling isn’t because the government wants to cancel the order, but because it wants a discount in price. It’s just speculation at this point, but I believe in a few weeks Bombardier will announce the deal will continue as planned, with a few price concessions thrown it to make the Russians happy. A discounted order is better than no order at all.

Even though the CSeries program has been plagued by delays, the company’s customers are still committed to taking delivery of the planes already ordered. The company needs to start delivering planes for the next wave of orders to come in, but the current backlog will keep workers busy for years building the already-ordered planes. Thus, it has plenty of time to get additional orders.

Don’t forget about trains

Discussion about Bombardier’s future is always dominated by its business jet program, and for good reason. If the company keeps bleeding cash developing a new series of aircraft that it never delivers, eventually it’ll go bankrupt.

However, while the aircraft division continues to be bogged down by delays and other problems, the company’s rail division continues to chug along. It’s a leader in both high-speed trains and subway cars and locomotives, both slow but steady growth businesses around the world.

Many medium-sized cities around the world are just starting to put in mass transit systems, and many parts of Europe and North America have infrastructure that’s all but worn out. Plus, traffic congestion continues to be a huge problem, especially in Asian cities that were never designed to handle a large volume of drivers. Growth in mass transit should be solid over the next few decades.

On top of that, Bombardier’s rail division actually makes money. Once the company’s aircraft division gets its act together and starts to show positive results, Bombardier’s shares could head significantly higher. Patient investors who buy now will likely see nice returns once the company is firing on all cylinders.

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Fool contributor Nelson Smith has no position in any stock mentioned in this article. 

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