Bombardier Inc. shares hit a fresh three-year high after the company received a favourable ruling in a highly-publicized trade dispute, but investors may want to temper their optimism — at least until later in 2018.
The U.S. International Trade Commission’s decision clears the way for Bombardier to sell 75 CSeries jets to Delta Air Lines Ltd., eliminates the nearly 300 per cent in related duties imposed by the U.S. Department of Commerce and opens up opportunities to kick-start sales campaigns in the U.S. market.
While the roughly 20 per cent two-day surge in Bombardier shares reflects a greater anticipated earnings contribution from the CSeries, along with the possibility of a resolution of the company’s trade spat with Boeing Co., the Canadian plane and train maker isn’t out of the woods just yet.
“Though we see this as a significant short-term victory for the company, the decision is unlikely to be the last chapter in the Bombardier-Boeing dispute,” said Chris Murray, an analyst at AltaCorp Capital.
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Boeing could appeal the decision, file a new complaint against Bombardier elsewhere, and U.S. President Donald Trump’s administration could pursue further trade actions.
Boeing lacks a compelling offering to compete with the CSeries in the 100 to 150 seat range, and its upcoming 737 MAX 7 single-aisle jet looks underwhelming, but a lot could change if the company joins forces with Embraer SA. Boeing confirmed that it was in discussions about a possible combination on Dec. 21.
Embraer has a similar portfolio to Bombardier, and on Friday, expressed support for the U.S. Department of Commerce’s claim that the Canadian government “heavily and illegally subsidized” the CSeries program. In September 2017, the World Trade Organization opened a dispute panel that will consider Brazil’s claim that its plane industry was harmed by Canada’s CSeries subsidies.
“We continue to see this process as business as usual in the aerospace sector, and we caution investors about being too emotional on either side of the argument,” Murray said, highlighting the dampening of both positive and negative economic impacts that will result from Bombardier’s CSeries partnership with Airbus SE.
Investors are hoping Bombardier’s deal with Airbus will not only lower the odds of future CSeries trade issues, but also help eliminate some of the delays that have plagued the project.
Bombardier only delivered 17 CSeries planes in 2017, falling short of its target range of 20 to 22 jets. The company recently reduced its 2018 guidance to a range of 20 to 22 planes, from 30 previously, blaming delays at its engine supplier Pratt & Whitney.
CSeries production problems and massive cost overruns forced Bombardier to seek financial assistance from the Quebec government in exchange for a stake in the program. Airbus later took a majority stake in the partnership, with an important element of that agreement being a shift in production to its plant in Alabama.
Tying up the Airbus deal should be an important stepping stone for CSeries orders both in the U.S. and internationally. Completion of the transaction is currently expected for the second half of 2018.
“This ruling does not guarantee the trade dispute is over, but it does make it more likely, in our view, that Bombardier and Airbus can begin delivering CSeries aircraft to U.S. customers sooner, and it removes one overhang to securing more orders,” said Seth Seifman, an analyst at J.P. Morgan.
Bombardier reports fourth quarter earnings on Feb. 15, but Seifman believes key catalysts for Bombardier should be weighted toward the second half of 2018. Those include certification of the Global 7000 business jet, better cash generation, the potential for additional CSeries orders and the Airbus agreement closing.
Bombardier appears on track to be cash flow break-even this year, as the turnaround story outlined by management continues to play out. The company’s credibility is on the path to being restored, but given the sharp run-up in the stock, it may be time to ease up on the throttle.