TSX Commentary

Bombardier Inc. (BBD.B) – $5.23 – Plant Tour Illustrates Cost Saving Opportunities in Mexico
Outperform, Above Average Risk, Price Target: $6.50
RBC CM attended a site tour of three of BBD’s Aerospace and Transportation plants in central Mexico. Among a number of capabilities, the Aerospace plants specialize in electrical harnesses and structural aircraft components, while the core competency of the Transportation plant is welding. The tour demonstrated that BBD is in the early stages of a long-term cost saving opportunity, driven by: 1) lower labour costs; 2) an offset to rising C$; and 3) bringing BBD closer to Mexican and Latin American markets. While this opportunity is substantial, RBC CM believes that significant cost-savings are a few years away. Labor represents only ~10% to 15% of total costs. Factoring in the cost of sourcing supply and shipping products back for assembly, current cost savings are likely not material. Once a local supply base is established, however, the cost saving opportunity could be quite material. Management believes Mexico is a nascent market with significant growth potential. Travel in Mexico is disproportionately split toward ground transportation (95%) vs. air (5%). RBC CM expects management to raise its forecast for Transportation EBIT margins when it reports Q4/F10 results April 1. This may be a key catalyst for valuation.