SmallCapPower | January 24, 2018: Bombardier Inc. (TSX:BBD.B), one of the world's leading manufacturers of both planes and trains, expects to see another year of 10% sales growth from its train segment, which will help boost its total sales to $20 billion by 2020.
Read: Bombardier (TSX:BBD.B) Stock: Is it Worth the Risk?
Orders for rail-equipment outpaced deliveries in 2017, and the trend is likely to continue in 2018 with potential orders in Asia, Europe and elsewhere demonstrating strong demand. The train segment has a future backlog of ~$33 billion as of September, representing more than three years' worth of business. Demand for trains is being driven in megacities such as London and Shanghai, as well as in emerging economies such as India, where orders are climbing as local officials turn to public transit to ease congestion. Additionally, train is gaining traction over aircraft travel, in travel between cities for trips of less than 1,000 kilometers (620 miles).
Laurent Troger, head of Bombardier's train business, commented that the Company has the capacity to meet this increasing demand. Troger is steering the maker of tramways, subways and high-speed trains through a business restructuring that began in 2016, when Bombardier announced 7,500 job cuts, most of which targeted the train division. About 75% of the plan has been put in place through agreements with unions in various countries. This transformation will enable Bombardier to become more agile and more competitive.
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Currently, Bombardier is facing stiff competition from industry leader CRRC and a European behemoth that will be created when the Alstom-Siemens deal closes later this year. Despite this heavy competition, Bombardier expects to sign a good number of deals in the future. In the Americas, Bombardier is keeping a close eye on government negotiations aimed at reshaping the North American Free Trade Agreement. Bombardier, which operates rail plants in all three NAFTA countries, would potentially use fewer Mexican suppliers or work with subcontractors that have a more global footprint if changes are made to the agreement.
Bombardier stock currently trades at a low price to TTM sales of 0.44x. Since the Company generates low operating margins of 1.7% (TTM), an appropriate valuation metric would be EV/EBITDA, which Bombardier trades at 30.39x.
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