Bombardier, Inc. (TSE:BBD.B) hope of securing a $1.6 billion British rail contract got brighter on July 5, after German competitor for the contract, Siemens, withdrew its bid for the Cross rail project. However, the firm needs to secure itself in the airline division of operations — which account for about 15% of sales — if it wants to realize maximum profit potential.
Bombardier air division is unclear
Siemens looks to be over capacity
Siemens told the Montreal Gazette on July 5 that it will not proceed with the process to secure the Cross rail project due to increasing obligations in other areas of the firm’s operations. That news should be taken with mixed reactions from investors, who could feel comforted that the firm has its hands full with business, but it puts into question the company’s ability to grow. Backing down from such a large contract is potentially missing out on a slew of revenue, and missed opportunities could be repeated if the company is already at full capacity.
One of the major projects at the company includes the $2.5 billion Thameslink project that the firm secured during a battle with Bombardier, Inc. (TSE:BBD.B) in 2011. But even with that project, it appears the company is over capacity. After all, the firm’s high-speed trains that were supposed to be delivered to Deutsche Bahn, are expected to be four years late. Furthermore, the firm is delayed on orders to Eurostar for high-speed trains that would link Paris to London and Bussels.
The Boeing Company (NYSE:BA) could control too much market share for Bombardier
Much of Bombardier, Inc. (TSE:BBD.B)’s success depends on its ability to profit from its airline business. That makes The Boeing Company (NYSE:BA) a major competitor, particularly during a time when the firm expects a doubling of aircraft in the next two decades.
The Boeing Company (NYSE:BA) has consistently shown its prowess at luring aircraft buyers to its product with United Airlines as a major buyer. At the Paris Air Show alone, the firm managed to claim orders at about $66 billion. Those orders set the business up nicely for at least the next ten years, as that is how long it takes to fill many of the orders. The amount includes around 442 aircraft.
Does Bombardier warrant a buy?
While I am not an investor who makes purchases based on speculation, I see major potential in Bombardier, Inc. (TSE:BBD.B)’s ability to increase profits if it secures the Cross rail project. Furthermore, the firm is willing to take on more business, unlike Siemens, and that could mean the company will have less competition to worry about for future projects.
However, Bombardier, Inc. (TSE:BBD.B) needs to show that its aerospace sales can compete with competitors such as The Boeing Company (NYSE:BA). According to officials with Boeing, air traffic is set to double within the next two decades. That shows major potential for Bombardier, though that division of the company has performed below market average since 2008.
As a final note, it should be noted that Bombardier, Inc. (TSE:BBD.B) is a diversified company, with its air and rail operations, while The Boeing Company (NYSE:BA) only operates in the aerospace field. I’m cautiously optimistic about Bombardier, though I think current activity indicates the firm will increase exposure to rail projects while decreasing activity in its aerospace division.
The article Is Rail Enough for Bombardier? originally appeared on Fool.com and is written by Phillip Woolgar.
Phillip Woolgar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Phillip is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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