The bulls are alive and kicking as ever in Canada as well as south of the border as markets continue to swing to new highs. The S&P/TSX Index is up about 9% so far this year, and steady economic data and strong corporate earnings, amongst other factors, continue to drive investor optimism.
The Canadian airline sector is particularly robust as air carriers post strong quarterly earnings with stable outlooks. Domestic Canadian traffic also increased 5% in May, while capacity grew 2.1% pushing up the load factor to 81.1%.
Although some investors may see surplus capacity in the industry and a weakening Loonie as concerns, placing one’s bets in the broader aerospace industry can pose less of a risk compared to singling out a specific airline. Companies supporting airlines are likely to do better than air carriers since the demand for their services is global, diluting the risk.
Here are two stocks that are overlooked and underloved.
CAE Inc.
This company is without a doubt a leader in its industry. CAE Inc. (TSX: CAE)(NYSE: CAE) develops flight simulators for airline companies and militaries around the globe.
The company posted a superb set of earnings for last quarter as well as for the fiscal year 2014. Profit and revenue were boosted by a record order backlog of about US$4.2 billion, which paves the way for higher revenues in the near future. The company also had orders for 48 full flight simulators last year and hopes to improve on that number this year.
Given the robustness in the Canadian airline industry, along with rapid growth in airline traffic in emerging markets, the demand for CAE’s services will only get stronger in the long term.
Trading at almost $15 per share, CAE trades at about 22 times its earnings. And traders are optimistic about the share price hitting the $20 mark.
Bombardier
Bombardier (TSX: BBD.B) has had a bumpy ride recently with all the bad news thrown at it in the past couple of months.
First there was the announcement that its new C Series class of jets would be delayed by six months from its original 2015 launch date.
Then came a series of agonizing order taunts. The market was buzzing with extensive rumors that Air Canada (TSX: AC.B) was considering buying 20 C Series planes, but the airline decided to scrap that plan and stick to its existing jets instead.
The knife was further pushed and twisted when Russia openly flirted with the idea of ending its $3.4 billion deal with Bombardier. The Russian government agreed to buy 100 Q400 turboprop planes. But the escalating crisis between Ukraine and Russia is putting a strain on the Canadian-Russian relationship as Canada took a hard stand against Russian President Vladimir Putin’s actions. The biggest loser due to these tensions may likely be Bombardier.
And finally, its soon-to-be-born C Series baby suffered engine failure issues causing the company to delay all future test flights.
After all this, who could blame the stock for being battered black and blue (or in this case, red, red, red)?
But within these dark clouds there’s a silver lining. There are several factors that investors seem to be forgetting about Bombardier. Its transport division is buoyant with the rail sector steadily delivering strong results. The company still makes money and earned a profit of $0.31 per share.
As Bombardier share price hovers around historical lows, investors should keep a close eye on the stock. But sometimes it’s also wise to cash in and scoop up a great deal when others are skeptical.
