Bombardier signs military contract with rival General Dynamics

Bombardier (CA:BBD.B) announced on May 18 that it will partner with its Canadian division. general dynamics (United States: G.D.) Develop a military reconnaissance aircraft to replace the CP-140 Aurora aircraft currently in production. Lockheed Martin (United States: LMT).

Never mind that General Dynamics is in direct competition with Bombardier’s business jet division because it builds Gulfstream’s private jets.

Bombardier management, which just reported strong first quarter 2023 results in late April, sounded very confident in its statement about the partnership.

“This is a generational opportunity for Canadian companies to leverage the made-in-Canada Global 6500 aircraft,” said Jean-Christophe Gallagher, Executive Vice President, Aircraft Sales and Bombardier Defense.

“…Bombardier’s commitment to CMMA is the right choice from an aircraft performance perspective and an opportunity for Canada to foster innovation, strengthen its capabilities and support talent across the Canadian aerospace industry.” ” he said.

The market reacted positively to the news. Bombardier stock was the best performer in the world on May 18, when he rose nearly 4%. S&P/TSX Composite Index.

This partnership is either a smart move or a stupid move on the part of Bombardier management. Let’s see.

Quant score shows fund favorites

These two stocks are among the top 15 holdings. US Global Jets ETF (USA: Jet). Of the 48 stocks in the exchange-traded fund’s portfolio, the weight of GD shares is 1.98% and the weight of BBD.B shares is 1.84%.

On Fintel’s Quanto Scoreboard, Bombardier has the highest fund sentiment score of 97.66. It ranks 80th out of 37,554 global equities valued by the model. General Dynamics scored 71.96, ranking 12,456 overall.

This score is a proprietary quantitative model that ranks companies based on their level of ownership accumulation. To calculate the ranking, we look at his two key factors. They are the change in the number of disclosed owners in the last quarter and the change in the portfolio allocation of existing owners in the previous quarter.

From multiple perspectives, Bombardier is trading at 10.14 times its earnings over the last 12 months. General Dynamics stock trades at 17.24x and the Jets ETF at 24.3x.

Bombardier’s business is booming

Bombardier’s CEO said in a press release that the Global 6500 aircraft is a Canadian-made innovation. That aircraft is definitely an expensive product that Canadians can be proud of.

In the first quarter, Bombardier delivered 22 jets, 14 expensive large planes and 8 midsize planes. 14 large aircraft generated 71% of his quarterly revenue of $1.5 billion (all US dollars unless otherwise noted). This equates to approximately $74 million per plane.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were also strong, increasing $45 million year over year to $212 million. The margin was 14.6%, an increase of 120 basis points over the same period last year.

The company had $14.8 billion in backlog at the end of the first quarter, flat from the end of December. Free cash flow for the quarter used $247 million, down $420 million from the year-ago quarter.

But most of the free cash flow used went toward a new manufacturing facility in Toronto’s Pearson International Airport building, which is scheduled to open in late 2023. That will lead to the cancellation of the backlog of orders. Based on his $5.4 billion in aircraft revenue in 2022, it should take almost three years to fulfill these orders.

That’s a good question.

Nothing compares to the dynamics in general

In the first quarter of 2023, General Dynamics had sales of $9.9 billion and net income of $730 million. The company’s business, based on revenue, is about seven times larger than Bombardier’s. The company had an order backlog of $89.8 billion at the end of March, six times that of Bombardier. That means you can have Bombardier for lunch.

But a closer look at General Dynamics’ quarterly report makes one thing pretty clear. The company’s aircraft business is no less important than Bombardier’s. Aircraft manufacturing revenue for the first quarter was $1.15 billion, down from $1.26 billion in the first quarter of 2022 and up by only $131.

In the first quarter, Bombardier beat General Dynamics in business aviation.

Where General Dynamics outperforms Bombardier is in technology. The company’s technology division generated about a third of revenue in the first quarter of 2023, with C5ISR solutions (command, control, communications, computer, cyber, intelligence, surveillance and reconnaissance) generating $1.07 billion in sales.

A joint press release from both companies highlights what General Dynamics brings.

“The aircraft will be equipped with General Dynamics’ best-in-class integrated mission systems derived directly from Canadian investments in the newly modernized CP140 Block IV and CH-148 Cyclone,” said May 18. stated in the press release of the day.

“This operationally proven Canadian design forms the basis for iterative, low-risk integration of modernized sensors and systems, helping Canada stay ahead of its peers and adversaries alike. make it possible.”

Bombardier is keen to grow its defense business.Working with General Dynamics is a risk, but it took a risk to convince the Canadian government to team up with a team other than General Dynamics. Boeing (USA: BA) And that P-8A Poseidon.

I hope someone at the Pentagon in Ottawa is old enough to remember Avro Arrow. On the surface, Bombardier’s move is stupid. In the long run, it could pay off.

This article was originally published on Fintel.

The views and opinions expressed herein are those of the authors and do not necessarily reflect those of Nasdaq, Inc.

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