Bombardier (CA:BBD.B) announced on May 18 that it was partnering with the Canadian division of General Dynamics (US:GD) to develop a military reconnaissance aircraft to replace the current CP-140 Aurora aircraft made by Lockheed Martin (US:LMT).

Never mind that General Dynamics makes Gulfstream private jets, thus competing directly with Bombardier’s business jet division.

Bombardier management, fresh off reporting strong first-quarter 2023 results in late April, sounded very confident in their statement about the partnership.

“This is a generational opportunity for a Canadian company to leverage its Made-In-Canada Global 6500 aircraft,” said Jean-Christophe Gallagher, executive vice president, Aircraft Sales and Bombardier Defense.

“ … Having Bombardier work on CMMA is the right choice from an aircraft performance standpoint, and also, an opportunity for Canada to foster innovation, bolster its capabilities and support talent across Canada’s aerospace industry from coast to coast to coast,” he said.

The markets reacted positively to the news. Bombardier stock gained nearly 4% on May 18, delivering one of the better performances on the S&P/TSX Composite Index.

The partnership is either a stroke of brilliance or a foolish move by Bombardier management. Let’s take a look.

Quant Scores Show Fund Favorite

The two stocks are among the top 15 holdings of the U.S. Global Jets ETF (US:JETS). Of the exchange-traded fund’s 48-stock portfolio, GD stock has a 1.98% weight while BBD.B stock carries a 1.84% weight.

On Fintel’s Quant Scoreboards, Bombardier has the higher score on Fund Sentiment, at 97.66. That ranks it number 80 among the 37,554 total global stocks assessed in the model. General Dynamics scores 71.96, ranking it at 12,456 of the total.

That score is a proprietary quantitative model that ranks companies based on levels of ownership accumulation. To calculate the ranking, we look at two key factors: the change in the number of disclosed owners over the prior quarter, and the change in portfolio allocation of existing owners over the prior quarter.

Multiple-wise, Bombardier is trading at 10.14x trailing 12-month earnings. General Dynamics shares have a 17.24x multiple, and the JETS ETF is trading at 24.3x.

Bombardier’s Business is Doing Well

Bombardier’s CEO stated in its press release that the Global 6500 aircraft is a Canadian-made innovation. Its aircraft are undoubtedly expensive products Canadians can be proud of.

In the first quarter, Bombardier delivered 22 jets, 14 larger aircraft with higher prices, and eight medium-sized planes. The 14 large aircraft generated 71% of its $1.5 billion (all figures in U.S. dollars unless noted) in quarterly revenue. That’s nearly $74 million per aircraft.

Also positive, its adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increased by $45 million year-over-year to $212 million. That’s a margin of 14.6%, 120 basis points higher than a year earlier.

The company’s order backlog at the end of the first quarter was $14.8 billion, flat to the end of December. It used $247 million in free cash flow in the quarter, down $420 million from a year earlier.

However, a large part of the free cash flow used was for the new manufacturing facility its building at Toronto’s Pearson International Airport, expected to open at the end of 2023. That will help with the backlog. Based on 2022 aircraft revenue of $5.4 billion, it should take almost three years to take care of those orders.

That’s a good problem to have.

Nothing Compared to General Dynamics

In Q1 2023, General Dynamics had net earnings of $730 million from revenue of $9.9 billion. Its business based on revenue is nearly 7x larger than Bombardier. At the end of March, the company’s backlog was $89.8 billion, 6x larger than Bombardier. So it could eat Bombardier for lunch.

However, when you drill into General Dynamics’ quarterly report, one thing becomes abundantly clear: Its aircraft business isn’t much more significant than Bombardier’s. Its aircraft manufacturing revenue in the first quarter was $1.15 billion, down from $1.26 billion in Q1 2022, only $131 higher.

In the first quarter, Bombardier got the better of General Dynamics regarding business aviation.

Where General Dynamics has an advantage over Bombardier is technology. Its Technologies segment generated about a third of its revenue in Q1 2023, with C5ISR solutions (command, control, communications, computers, cyber, intelligence, surveillance and reconnaissance) chipping in $1.07 billion.

The two companies’ joint press release highlights what General Dynamics brings.

“The aircraft will host General Dynamics’ best-in-class integrated mission systems, drawing directly from Canada’s investment in the newly modernized CP140 Block IV and CH-148 Cyclone,” stated the May 18 press release.

“This operationally proven Canadian design forms the basis for the iterative and low risk integration of modernized sensors and systems enabling Canada to leap even further ahead of peers and adversaries alike.”

Bombardier is eager to grow its defense business. Teaming with General Dynamics is a risk, but one it had to take to convince the Canadian government to go with someone other than Boeing (US:BA) and its P-8A Poseidon.

Hopefully, someone at the Department of National Defence in Ottawa is old enough to remember the Avro Arrow. Bombardier’s move, on the surface, is a foolish one. Long-term, it could just pay off.

This article originally appeared on Fintel

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