Aug. 17, 2016: Bombardier’s first-half orders from Air Canada and Delta Air Lines for the C
Series helped, but didn’t eliminate skeptics.
Canadian securities firm GMP issued a note Aug. 5 (though we received it only Aug. 12) that maintains a Hold rating.
Goldman Sachs worries about wide-body production rates and overall supply and demand. Morgan Stanley also points to supply-demand.
Aug. 5, 2016 (Received Aug. 12, 2016)
The new management team continues to execute (i.e. ruthlessly cut costs and prune non-core businesses), liquidity has improved (i.e. with investments from La Caisse and the Gov’t of Quebec), and the worst appears to be passed (i.e. most of the write-downs and cost overruns).
It seems like it’s back to business as usual for Bombardier… unfortunately however we were hoping for a major game-changer in Aerospace (i.e. CSeries, Global, Learjet). Perhaps an LCC steps up and CSeries becomes instrumental to a new business model? I’m not holding my breath, but that would change my view.
Progress on turnaround continues; we wait for more orders
Bombardier continues to make progress on cost structure, liquidity and sales, and valuation has now re-rated and is in line with peers. We also see improving margins and cash flow as positives, balanced by near-term demand risks in Aerospace. We maintain our target price of C$1.95, based on 7x 2017 EV/EBITDA and a C$ at US$0.75. HOLD.
Reading Between the Lines, Aug. 16, 2016:
Wide-body challenge intensifies. Multiple wide-body rate reductions have now been announced, but the risk of more seems high as all leading indicator data is still deteriorating. Airlines keep saying supply is outpacing demand. Too many new seats coming in to the system relative to the demand to fly is pressuring yields and leading many airlines to trim capacity and defer orders.
General Note, Aug. 12, 2016
US Airlines: Pricing is improving at a slow clip, but carriers are beginning to address the imbalance with supply tweaks and hints of more to come. Based on outlooks, unit revenues into 3Q16 should show limited sequential improvement (less than 50bps); this is somewhat below initial expectations of up to 100bps, but is still moving in the right direction. Furthermore, the imbalance prompted Legacy carriers to support capacity cuts later this year that begin to address oversupply, though we do not view them as enough to fully address the existing imbalance. On that note, carriers seemed to acknowledge that 2017 growth would likely have to come in too. Further clarity will likely come later this year and our updated projections are for ~3.2% in additions vs. ~4% in 2016. From here, we prefer airlines with a mix of decelerating supply profiles and supportive revenue initiatives all of which we find in our OW-rated names (AAL, ALK, DAL, and UAL). See US Airlines: Showing Signs of Oversupply Abatement.
Aerospace & Lessors: Potential cuts upcoming on widebody programs while bizjet struggles to find a bottom. It became apparent during earnings that given sluggish demand, prior widebody cuts were potentially not enough and there is further risk. BA (OW) and SPR (OW) would be most impacted by another 777 cut and could lower our estimates by ~10% in 2017 / 2018 assuming a 1/month reduction. Lessors also corroborated continued weakness on the widebody front. On bizjets, while TXT (UW) was able to maintain its guidance, albeit with lower margins, several other OEMs cut their 2016 delivery forecasts and many suppliers do not expect any near-term rebound. Into year-end, we prefer positioning that favors companies with idiosyncratic stories such as EW-rated TDG (on capital deployment) and SPR (on contract resolution).
Where are estimates and PTs going? Airline estimates move up marginally, Aerospace and Lessor estimates are broadly unchanged, and PTs are more or less stable across the board. On Airlines, estimates are marginally up primarily on lower fuel (but are still broadly below consensus by ~5% per our conservative pricing outlook) and slight multiple compression offsets the move. Regarding Aerospace, we adjust our bizjet outlooks downward, impacting COL (EW) and TXT most, with aggregate PTs broadly unchanged from prior. Lastly on the Lessors, we maintain our relatively stable estimates with some improvement at AYR and FLY (both EW) based on opportunistic progress.