Canada's Aerospace Firms Sees Further Growth By Mary Weil
October 31, 1997 2:49 PM Dow Jones News Service
TORONTO (Dow Jones)--The aerospace industry in
Canada may be growing, but analysts aren't expecting
Canadian companies to show the benefits of this growth
in the latest quarter.
Spar Aerospace Ltd. (T.SPZ) is still struggling under the
weight of a US$135 million lawsuit and analysts said
investors need to look a bit further into the future before
CAE Inc.'s (T.CAE) and Bombardier Inc.'s (BBD.A)
earnings start to take off.
But Daniel Verreault, vice-president of policy and
research at Aerospace Industries Association of
Canada, said that in terms of overall revenues, the
industry is moving ahead.
"At the beginning of 1997, we estimated that the industry
would reach C$13.5 billion in total sales in 1997. Data
to date indicates we have surpassed the C$13.5 billion
(mark) already," he said. In 1996, Canada's aerospace
industry rang up sales of C$12.5 billion.
The cause of this growth is simple - more airplanes are
being built as airlines renew their fleets.
Bombardier Inc. (BBD.A), by far Canada's largest
aerospace company, also makes transportation
equipment and motorized consumer products. Although
Bombardier's prospects are "quite exciting," said Ted
Larkin, analyst with Bunting Warburg, the company is
taking a bit of a hit this year because of soft personal
watercraft sales. First Call Inc.'s mean estimate for
Bombardier's third quarter ending Friday is 27 Canadian
cents a diluted share, unchanged from a year earlier.
For the year ending Jan. 31, 1998, Larkin is also
expecting earnings to be about flat, at C$1.15 a diluted
share versus C$1.18 a diluted share a year earlier.
After fiscal 1998, Larkin said he expects Bombardier's
earnings to ramp up solidly, growing to C$1.50 a diluted
share in fiscal 1999 and C$1.95 a diluted share in fiscal
2000. The increase will be driven principally by growth
in Bombardier's aerospace division, said Larkin, pointing
out that with the merger of Boeing Co. (BA) and
McDonnell Douglas Corp. (MD), Bombardier is the
third-largest manufacturer of commercial aircraft in the
world.
Bombardier's growth is aided by its plans to unveil a
new product in each of the next several years, said
Larkin.
Current Earnings Mostly Flat
Boeing Co.'s (BA) production bottleneck problems will
have a ripple effect throughout the industry, but analyst
James David of HSBC James Capel Canada Inc. isn't
too worried about the overall effect on Canadian
companies.
"I'm not terribly concerned about (the situation) because
ultimately the orders are still there - this just spreads
them out a little bit longer than they otherwise would
have been," he said.
The situation is being viewed positively by Greg
McLeish, analyst with Octagon Capital Canada Corp.,
at least as far as it relates to Magellan Aerospace Corp.
(T.MAL).
Magellan makes and repairs parts for the aerospace
industry.
McLeish said Magellan is a "well-managed," aggressive
company that has the potential to step in and compete
with smaller companies that are having trouble meeting
Boeing's production schedule.
McLeish still views Magellan as a "buy" in spite of its
recent stock price appreciation. The stock is trading late
Friday at 10.50 in Toronto, compared with 7.70 in
mid-September when McLeish issued a buy
recommendation and a stock price target of C$10 to
C$12. He said he's in the midst of revising his numbers.
John Sartz, portfolio manager of the Global Strategy
Canadian Small Cap Fund, is also bullish on Magellan,
saying the company has proved itself a survivor in the
aerospace industry's recent consolidation.
Magellan completed the purchase of Bristol Aerospace
Ltd. from Rolls-Royce Industries Canada in July.
Sartz said he's not looking for any surprises in
Magellan's third quarter ended Sept. 30. He declined to
elaborate. In the year-earlier third quarter, Magellan
posted a loss of 1 Canadian cent a share.
Simulator-maker CAE Inc. (T.CAE) is also expected to
turn in an unremarkable performance for its most recent
quarter, but most analysts are bullish about the
company's future over the next two years.
Tony Yue, analyst with Brink, Hudson & Lefever Ltd.,
is expecting CAE to report second-quarter operating
earnings that are flat or "modestly lower" than last year,
but he added that moving into the third quarter, CAE
should see "very strong earnings momentum." For the
second quarter ended Sept. 30, 1996, CAE reported
net of 11 Canadian cents a share.
Orders for simulators tend to lag behind orders for
aircraft which Boeing and similar companies have been
seeing recently, so CAE should see growth fueled by
aircraft orders over the next 12 months, said Ted
Larkin, analyst with Bunting Warburg.
Overall, for CAE's fiscal year ending March 31, 1998,
Larkin is expecting about 13% earnings growth.
CAE's Stock Seen Rising
Analyst Ted Larkin of Bunting Warburg is looking for
CAE Inc.'s (T.CAE) military sector to continue
performing steadily. About 75% of CAE's revenues are
derived from aerospace, split between military orders
and commercial orders, with the rest coming from
CAE's industrial technologies division.
In spite of some reductions in military spending with the
end of the Cold War, CAE has emerged relatively
unscathed because training using simulators is much
cheaper than training using actual fighter planes.
Brink, Hudson & Lefever Ltd.'s Tony Yue is looking for
CAE's stock to grow along with the company's earnings.
"It wouldn't surprise me to see CAE's stock hitting the
C$14 or C$15 level in the 12- to 18-month timeframe,"
said Yue. CAE is currently trading at 11.80 in Toronto.
Spar Aerospace Ltd. (T.SPZ) is less exciting because of
the US$135 million lawsuit hanging over it, said Yue.
Yue also pointed out that although Spar has businesses
in the communications, aviation technology, software
and space sectors, it is really is more focused on space
than aerospace and therefore difficult to compare with
aerospace companies.
The lawsuit relates to an allegedly defective mobile
communications satellite launched in April 1995.
Investors are also waiting for an announcement
regarding the possible sale of Spar's ComStream
division. In August, the company hired an investment
banking firm to advise it on strategic alternatives for
ComStream, a supplier of satellite communications
networks and products.
First Call Inc.'s mean estimate for Spar's third quarter
ended Sept. 30 is net of 7 Canadian cents a share, up
from a loss of 20 Canadian cents a share a year earlier.
The 1996 results exclude a charge of C$2.73 a share
for restructuring costs.
-By Mary Weil; 416-943-7808
smartmoney.com
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