* Says business aircraft cancellations substantially lower
* Q1 EPS $0.08 vs $0.09 yr earlier
* Analysts had expected EPS $0.07
* Revenue down 7 pct at $4.2 bln
* Shares end up 4.8 pct on the TSX (Adds details, updates stock price. In U.S. dollars unless noted)
By John McCrank
TORONTO, June 2 (Reuters) - Bombardier Inc (BBDb.TO) said on Wednesday its quarterly profit fell 3 percent, but signs of improvement in the recession-battered aerospace sector helped the plane and train maker beat market expectations slightly.
Its stock rose nearly 5 percent following the results, but was still down 23 percent from its one-year high, hit in March. The aerospace slump and Bombardier's announcement in April that it scaled back forecasts for its train-making segment have weighed on the shares.
Bombardier, the world's No. 3 civil aircraft maker after Boeing (BA.N) and Airbus EAD.PA, said on Wednesday that the lucrative business jet segment, where it is the market leader, was starting to stabilize. Cancellations, a sign that business clients are pulling out of the market, had dropped substantially.
But Michael Willemse, an analyst at CIBC World Markets, said that did not have to mean production would rise in the near term.
"They've got to wait until the backlog in business jets goes up before you see any increase in production rates, so I would think we are probably going to be pretty stable before we see an uptick," he said.
Guy Hachey, who heads Bombardier's aerospace division, told the company's annual meeting that the next few months would be difficult because there is always a lag between a recovering economy and a boost revenues.
The company also said it was worried about conditions in Europe, where it has big rail operations.
"We continue to monitor the situation and to manage our activities with rigor and discipline," Chief Executive Pierre Beaudoin said.
For its first quarter, ended April 30, Bombardier reported net income of $153 million, or 8 cents a share, down from $158 million, or 9 cents a share, a year earlier. Revenue fell 7 percent to $4.25 billion.
Analysts, on average, had expected earnings of 7 cents a share on revenue of $4.24 billion, according to Thomson Reuters I/B/E/S.
Willemse said the slightly better than expected performance was due to higher margins in the aerospace division compared to the fourth quarter.
Bombardier said its commercial aircraft division benefited from the first U.S. order for its new narrow body C-Series aircraft, its first foray in the narrow body 100- to 149-seat market which is dominated by its bigger rivals..
Hachey said that in the next 20 years, 6,300 planes in that segment will have to be replaced or added to fleets, and Bombardier aimed to capture 50 percent of that market.
The company has so far received 90 firm C-Series orders and 90 options. Deliveries are expected to start in 2013.
He said Bombardier hoped to announce C-Series deals in China "sometime this year."
Bombardier, also the world's No. 1 train maker, reported a solid $2.9 billion in orders for its rail transport segment, up from $1.2 billion for the same period last year.
Rail transport revenue was flat at $2.3 billion.
Aerospace revenue fell 14 percent to $1.9 billion, mainly due to lower deliveries of commercial aircraft, where it delivered 53 planes versus from 75 a year earlier.
Its overall backlog was $44.4 billion, compared with $43.8 billion as of Jan. 31.
Shares of Montreal-based Bombardier ended up 4.8 percent at C$4.83 on the Toronto Stock Exchange on Wednesday.
The shares are well below their all-time high of C$26.70 in 2000. Bombardier's stock plummeted in 2001 after the Sept. 11 attacks on the United States and never fully recovered. They climbed to nearly C$9.00 in 2008, but then fell again as the global recession hit, stifling demand for business jets and air travel.
$1=$1.04 Canadian Additional reporting Bhaswati Mukhopadhyay in Bangalore; editing by Rob Wilson