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CSeries delivery challenges gets Bombardier downgraded by Goldman Sachs

MONTREAL - Goldman Sachs has reiterated its downgrade of Bombardier (TSX:BBD.B) and shaved its stock price forecast even further amid expectations of additional delays in the Quebec company's CSeries jetliner program and the decision by a Swedish buyer to abandon its position as launch operator.

"We believe another delay in the Bombardier CSeries entry-into-service is inevitable, increasingly likely before 2014 year-end, and could even occur whenever flight tests resume," New York analyst Noah Poponak wrote Tuesday in a report.

The CSeries commercial jet has been grounded for more than three months since an engine failure halted its flight test program.

Swedish company Braathens Aviation (Malmo) disclosed last week that it will no longer be the aircraft's first operator. In 2011, it placed an order for five CS100 planes and five CS300 models, for a total of $655 million, with options on more.

But the CSeries development program is two years behind schedule, with the flight test phase often proving the most challenging for any new aircraft.

The Goldman anticipates the plane will be more than six months behind Bombardier's plan to deliver the smaller CS100 version with 110 to 125 seats during the second half of 2015. It's an outlook shared by many other analysts.

He said the plane and its larger CS300 version with up to 160 seats plane will "negatively impact" Bombardier's (TSX:BBD.B) financial results and create "negative catalysts" for several years. He shaved 20 cents off his 12-month target price for Bombardier shares to C$3 and once again urged investors to sell the stock.

The plane requires 2,400 flight test hours for certification but has flown just 300 hours. Poponak said Bombardier will have to dramatically pick up the pace of flight tests to 160 hours per month to achieve its delivery schedule.

"We see that as very unlikely given the pace achieved before grounding, momentum (not just time) lost during grounding, and the high risk of new problems occurring other than this engine incident," he wrote in a report.

The analyst added that the size and quality of the CSeries orders suggest overall demand may not be strong with a significant risk of deferrals and cancellations.

Bombardier has received 203 firm orders and 513 overall commitments for the airplane. It hopes to have 300 firm orders by first delivery.

DBRS Ratings Service maintained its rating for Bombardier at BB (low). It said the company's credit metrics have been deteriorating and will remain constrained by high capital expenditures at the aerospace division and weak profitability in transportation for 12 to 14 months.

"Even though the company has adequate liquidity to fund its operations, ongoing cash burn in the last few years could put the company’s liquidity position at risk," it wrote last week, adding that a downgrade could happen with further CSeries delays.

But Canaccord Genuity analyst David Tyerman sees promise in Bombardier, maintaining a $5 target price. He foresees "significant" earnings growth in the coming years from new aircraft launches, margin improvements at aerospace and transportation from restructuring, higher demand for some aircraft and the lower Canadian dollar.

He cautions that Bombardier's improvement may unfold slowly but doesn't believe Malmo's decision will change prospects for the plane.

"So, our buy call is best for patient investors," he wrote, adding that the CSeries should be a positive catalyst in the coming year.

Tyerman said he expects other CSeries customers will either take Malmo's slots or the delivery schedule will start more slowly than originally planned.

On the Toronto Stock Exchange, Bombardier's shares were down one cent at C$3.65 in Tuesday afternoon trading. Over the past year, they have traded between $3.44 and $5.43.

Follow @RossMarowits on Twitter

The Canadian Press


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