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RBC downgrades Bombardier as C Series concerns grow

RBC Dominion Securities Inc. is growing more concerned with Bombardier Inc. as the company faces the dual challenge of successfully getting its C Series off the ground while finding new customers to buy the aircraft.

Analyst Walter Spracklin today downgraded the stock to "sector perform" from "outperform," while slashing his price target by $1.50 to $7.

"This is on the back of what we consider to be emerging risk headwinds," he explained in a research note.

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Mr. Spracklin had been feeling bullish about Bombardier in recent months, citing growing demand for business jets, the recovering economy and the company's favourable financial condition. But he now believes these positive factors have been built into valuations at the current stock price. "Going forward, we believe the operating environment (including program execution) and securing new orders for the C Series will become more challenging," he said.

After doing some research into recent aerospace program launches, he found that delays are typically announced about two years before a a new aircraft enters service. "As such, we believe the risk window for potential development delays increases significantly as we approach the two-year window for the C Series: Q4/11."

The C Series will be the most advanced aircraft in the 100- to 150-seat capacity segment, and several new technologies will be implemented at the same time. Mr. Spracklin worries this could be a recipe for trouble.

Meanwhile, competition is growing in the narrow-body aircraft segment after Boeing announced it was shelving the option of making an all-new 737 short-haul jet in favour of the quicker route of using new engines. The decision gives Bombardier less time to market and establish the C Series. American Airlines this week already committed to order the 737s with more fuel-efficient engines.

"The key here is that Boeing will now have a proven marketing tool when competing on new orders," Mr. Spracklin said.

On the bright side, the analyst said he still believes Bombardier shares represent a value opportunity in the longer run.

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Thomson Reuters Corp. said late Thursday it expects second-quarter earnings per share to come in between 49 cents and 52 cents and revenues between $3.1-billion to $3.2-billion, in line with analyst expectations. It also said its Markets division head Devin Wenig is leaving the company and that it is reorganizing the unit.

"Today's announcement provides some reassurance on the quarter coming next week, and does reaffirm guidance, which is key to the story," commented CIBC World Markets Inc. analyst Robert Bek. "The shares have sold off too much on execution concerns."

Upside: Mr. Bek continues to rate Thomson Reuters as a "sector outperformer" with a $45 (U.S.) price target.

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Lundin Mining Corp. said high ground stresses at the Neves Corvo mine in Portugal, first experienced early this year, continued to negatively affect production in the second quarter. As a result, the company's copper production came in 24 per cent below TD Newcrest analyst Greg Barnes expectations for the three-month period.

While the company is expected to make up some of the lost copper production later this year, 2011 production guidance from the mine has been reduced by 4,000 tonnes to 72,000 tonnes. Zinc production guidance from Neves for 2011 has been lowered to 6,000 tonnes from 25,000 tonnes.

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Downside: Mr. Barnes downgraded the stock to "hold" from "buy" and cut his 12-month price target by $1 to $8.

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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