Skip to content

Do Stock Prices Mean Anything?

November 28, 2012

We’ve asked that question before and the answer is (Still) No, they don’t mean anything. And we have looked at a lot of stock prices. What animates us today is the stock price of one of Quebec Limited’s (please see our Post, Quebec Limited, September 2012) premier technological and manufacturing companies which is respected world-wide for design, manufacturing and service, and able to sell large quantities of jet aircraft in the range of $20 million to $100 million each and install large networks of trains and buses to get to them (and everywhere else) in almost every capital of the world. Of course, the company is Bombardier Incorporated and the stock can be had today (by anyone) for $3 per share and a significant discount from $6 to $7 per share just last year. Is that good “value” or not?

Bombardier has over 60,000 full-time employees and is currently paying a stock dividend of $0.10 or $175 million per year for a current yield of 3% which is somewhat better than the rate of inflation. The current market value is about $6 billion with total assets of $25 billion and a net worth or shareholders equity of $1.2 billion leaving a debt or total liabilities of about $24 billion.

We, of course, (“good value” or not) have not owned Bombardier stock for quite some time (please see Exhibit 1 below) and are not buying it now despite the good news (Reuters, November 27, 2012, Bombardier signs record $7.8 billion deal with VistaJet) that seems to have jumped up the stock price by $0.25 or 8% today. But we’re not buying it today because – and only because – the ambient stock price and therefore the Stock Price (SP) (Red Line in Exhibit 1 below, a step-function) remains stubbornly below the Risk Price (SF) (Black Line and also a step-function) which is stuck at $6 although we have owned the stock between $3 and $7 in 2009 through mid-year 2011, but not since.

It seems like a small reason (Red Line below Black Line, you say? Please see our Post, The Price of Risk, August 2012, for more information on what is being measured and the meaning of that.) not to own the stock of this promising company and enterprise that delivers spectacularly on its promises. But, as investors and shareholders and not owners, we need to ask the fundamental questions of

Will we get our money back (100% Capital Safety)? And can we expect to obtain a hopeful (but not necessarily guaranteed) return that exceeds the rate of inflation? Speculators or gamblers might think that the $3 stock can’t possibly do anything but go up, over time, but when will that be and what keeps it from dropping below $3 to $2 to $1.50 to $1 to (unthinkable) zero?

The scuttlebutt is that

The VistaJet order comes three weeks after Bombardier pushed back the first flight of its new C-Series jetliner by six months due to delayed deliveries from suppliers, sending its shares lower.

Investors worried that Bombardier would not be able to meet its new deadline and that it would have to discount the aircraft to boost sales.

And investors remain cautious on Bombardier shares due to lingering uncertainty about the C-Series development schedule, the potential for weaker margin guidance when the company reports fourth-quarter results, and the risk that weak free cash flow will linger through 2013.

And in order for us to make money on the stock, the stock price has to go up but why and when? When thinking about stock prices, it gives us pause to consider that a company that successfully makes and markets jets and trains should be “worth” $6 billion or so whereas a company that makes and markets telephones and computers should be “worth” more than $600 billion or one hundred times as much. Please see our Post, (B)(N) AAPL Apple Incorporated, October 2012, or the related Initial Purchase Offers (IPOs), November 2012, for more on the magic of market prices and, for the cost of going “bareback”, so to speak, The Active Investor (DOA), November 2012.

There is, however, one redeeming thought. Bombardier has about 1.7 billion common shares outstanding but about 1/5th of those shares (the Class A Shares BBD.A) or 315 million shares (the “ownership block”) have ten times the voting power of a Class B common share.

Exhibit 1: (B)(N) BBD.B Bombardier Incorporated – Risk Chart

Bombardier Incorporated manufactures transportation equipment worldwide. It operates in two segments, Bombardier Aerospace and Bombardier Transportation.

(Please Click on the Chart to make it larger if required.)

Bombardier Aerospace (BA) is a world leader in the design, manufacture and support of innovative aviation products. BA’s aircraft portfolio includes a comprehensive line of business aircraft, commercial aircraft including regional jets, turboprops and single-aisle mainline jets, as well as specialized and amphibious aircraft. BA also offers aftermarket services as well as Flexjet fractional ownership and flight entitlement programs.

Bombardier Transportation (BT) is the world leader in the design, manufacture and support of rail equipment and systems, offering a full range of passenger railcars, locomotives, light rail vehicles and automated people movers. It also provides bogies (wheel chassies), electric propulsion, control equipment and maintenance services, as well as complete rail transportation systems and rail control solutions.

Postscript

We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of  investment lore. We have just one product

The Perpetual Bond
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
Guaranteed
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories ust attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.

Disclaimer

Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

No comments yet

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: