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Bombardier shares won’t sustain new altitude

Hats off to Bombardier Inc. for bagging yet another record business jet order, its third in less than two years. As usual, investors have bid the stock up in response – the shares closed up 8 per cent on Tuesday in heavy trading. As usual, expect the share price to skitter back down again over the next few days or weeks. This order is not enough to give the stock sustained liftoff.

The deal is no small feat: Bombardier has booked 56 firm orders for its marquee long-range Global airplanes from VistaJet, a Swiss luxury charter service. The contract is worth $3.1-billion (U.S.), and has options for another 86 jets. This follows an order in March of 2011 from NetJets for 50 Globals, which was a record in private aviation until it was eclipsed this past June by a follow-on firm order from NetJets for another 100 Challengers.

But consider what happened after each of those two orders were announced. Bombardier's widely held B shares popped by 7.5 per cent the day after the first NetJets order was disclosed. Seven trading days later, the stock ended below where it had closed the day before the deal. The same thing happened this past June. After a 6.1-per-cent single-day jump by the stock following NetJets' Challenger order, it took all of 31 trading days for those gains to vaporize.

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So why don't the big plane orders add a sustained boost to the stock like they did in the 1990s?

For one, large orders come with risks. The selling price is likely lower than individual transactions (volume discount, of course) so profit margins are thinner. And while the orders are considered "firm," they are hardly set in stone, and at risk when the economy goes south. In 2010, NetJets cancelled dozens of orders from Dassault for its Falcon planes, and earlier this year, NetJets chairman and CEO Jordan Hansell acknowledged it's "always possible" NetJets could change its order and walk away from its deposit. "It just depends on whatever economic conditions are in place at the time," he said.

It's also important to put the VistaJet order in perspective. The firm order is equal to two months of Bombardier's 2011 revenue, but deliveries will likely be spread out over seven years, based on VistaJet's past delivery rate. The impact on the bottom line is even less noticeable: a grand total of 15 cents a share (spread out over many years), assuming the company earns a 10-per-cent profit before interest and tax, National Bank Financial analyst Cameron Doerksen figures.

So expect today's pop to be temporary. Pretty soon, investors will again turn their attention back to other worries that have weighed on the stock of late, including the delayed C Series airliner and the company's sharply lower cash flows.

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About the Author

Sean Silcoff joined The Globe and Mail in January, 2012, following an 18-year-career in journalism and communications. He previously worked as a columnist and Montreal correspondent for the National Post and as a staff writer at Canadian Business Magazine, where he was project co-ordinator of the magazine's inaugural Rich 100 list. More

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