(B)(N) BBD-B Bombardier Incorporated

Drama. Bombardier Incorporated, the maker of fine transport of all sorts, is on a budget as sales are down to $16 billion from $24 billion in 2009 and the net profit after tax is down to $600 million from $1.2 billion in 2009; and the dividend has dropped from $170 million last year to an anticipated $144 million this year and a current yield of 2%.

Bombardier C-Series Narrow Body Commercial Jet

The current stock price is $4.90 which is up +50% from $3 last year but still far off  from $15 ten years ago and $40 in 2000.

And all eyes on the new C-Series narrow bodied jet aircraft which is the largest commercial airplane at 100 to 150 seats that Bombardier has ever developed and it’s been under development for the last five years with the earliest service expected in 2014, which can be a very long time in a buyers market (Reuters, November 9, 2012, Analysis: Delay on Bombardier’s new jet heightens price pressure).

To make matters worse, the C-Series promised market-beating performance due to new engine technology and a lighter air frame, but Boeing and Airbus have since launched similarly advanced planes based on their best-selling 737 and A320 models and eclipsed much of Bombardier’s early advantage (ibid, Reuters, November 9, 2012).

Can the bear survive?

And to make matters still worse, the company has a debt of $24 billion, a net worth of $1.3 billion, and inventories of $7.6 billion, a matter that has not escaped the attention of the ratings agencies (Reuters, November 12, 2012, Fitch downgrades Bombardier after C-Series delay).

Despite all of that, the trading volumes have averaged 5 million shares a day since last November, of 1.4 billion shares outstanding, and 10 million to 25 million shares have changed hands on several days as recently as May; and there are no large institutional holders that we know of.

But the decision to buy or not to buy is easy and bloodless for us. The current stock price is below the price of risk, and therefore, we can’t buy it. Please see Exhibit 1 below, Red Line Stock Price (SP) above the Black Line Risk Price (SF) and for no other reason; and the last time that we owned it, we were sold out on a stop/loss at $6 in 2011.

Our current estimate of the demonstrated downside volatility in the stock price is minus ($1) so that it could be trading between the current price of $5 and $4 or $6, absent a “surprise”.

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

(B)(N) BBD-B Bombardier Incorporated – June 2013

Bombardier Incorporated manufactures transportation equipment. The Company operates in two segments, Bombardier Aerospace and Bombardier Transportation.

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

From the Company: Bombardier Incorporated manufactures and sells transportation equipment worldwide. It operates in two segments, Bombardier Aerospace and Bombardier Transportation. The Bombardier Aerospace segment designs, manufactures, and supports aviation products comprising business aircrafts; commercial aircrafts, including regional jets, turboprops, and single-aisle mainline jets; and specialized and amphibious aircrafts. This segment also offers aircraft parts, maintenance, and training services; and online services, as well as Flexjet fractional ownership and flight entitlement programs. The Bombardier Transportation segment designs, manufactures, and supports rail equipment and systems, offering a range of passenger railcars, locomotives, light rail vehicles, and automated people movers. It also provides bogies, electric propulsion, control equipment, and maintenance services, as well as rail transportation systems and rail control solutions. Bombardier Inc. was founded in 1942 and has 64,000 employees and is headquartered in Montreal, Canada.

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks. Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.

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 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*.