Bombardier Loses Its Edge on Embraer After Just Four Days

(Bloomberg) -- Bombardier Inc.'s edge over arch-rival Embraer SA didn't last long.

Four days after the Canadian jetmaker completed its tie-up with Airbus SE, Embraer announced its own joint venture with Boeing Co., giving both regional jet makers deep-pocketed partners as they do battle at the low end of the commercial aircraft market.

Boeing's partnership with Embraer is clearly a “direct response” to the competitive threat that emerged from the Bombardier-Airbus deal, RBC Capital Markets analyst Walter Spracklin wrote in a note Thursday. He added that both deals should enhance the companies' product portfolios, with the exception of Bombardier's smaller CRJ and Q400 aircraft, which aren't part of the venture.

“As a result, we could see somewhat of a disadvantage as the company will now be selling against a competitor with significantly more sales and marketing clout,” Spracklin wrote. “Nevertheless, we see Bombardier's regional jets as having a competitive cost element -- and we are maintaining our (already muted) sales forecasts in regional aircraft.”

Boeing and Embraer on Thursday announced a $4.75 billion deal in which Chicago-based Boeing will control 80 percent of Embraer's commercial airplane and services businesses, with the Brazilian manufacturer taking the remaining 20 percent.

C-Series Deal

The venture is similar to Airbus's acquisition of a majority stake in Bombardier's C Series jetliner, except Airbus didn't pay anything up front. That deal was announced in October and closed on July 1.

Bombardier and Airbus have a “first-mover advantage” with their tie-up, as the Boeing-Embraer partnership isn't expected to add to earnings until 2020, said Chris Murray, analyst at AltaCorp Capital, who upgraded Bombardier to outperform from sector perform on Wednesday.

“One of the reasons we got more confident on the stock is the JV structure with Airbus significantly derisks some of the C Series program and at the same time continues to expand it and gives it good opportunity for growth,” Murray said in an interview. “Bombardier will own a smaller piece of a larger pie, which is positive.”

The days when Bombardier's share price would rise and fall with the fortunes of the troubled C Series program are behind it, according Raymond James analyst Steve Hansen, who raised his price target on the stock to C$6 from C$4.75 on Thursday.

New Chapter

Bombardier has begun a “new chapter” in its evolution that will be increasingly defined by its business aircraft (BA) and railway, or transportation (BT) units, Hansen wrote.

“To be sure, commercial aircraft and aerostructures will still play important roles,” he said. “Ultimately, however, we expect these efforts will be overshadowed by the firm's leading BA & BT businesses which stand to benefit from strong backlogs, healthy macro tailwinds, and catalyst-rich futures.”

For a day at least, Bombardier also beat Embraer in the stock market. Bombardier shares rose 3.7 percent to C$5.19 at 1:19 p.m. in Toronto. The stock, which traded below C$1 two years ago, has gained 72 percent this year, the third-best performer on the S&P/TSX Composite Index. Embraer dropped almost 10 percent in New York as investors were expecting a higher sale price from Boeing. Shares have fallen 1 percent on the year.

To contact the reporter on this story: Kristine Owram in Toronto at kowram@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, David Scanlan, Brendan Case

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