It’s been said the COVID-inspired bargains in the market are all gone by now but here’s one to ponder: why is flight training company CAE (CAE Stock Quote, Chart, News TSX:CAE) doing so poorly when the skies ahead look so blue? Portfolio manager Ryan Bushell thinks it’s a market misread and one investors should be taking advantage of.
“Somewhere over 50 per cent of their business is geared towards defense and business jets and both areas are actually doing quite well right now,” says Bushell, president of Newhaven Asset Management, speaking on BNN Bloomberg on Wednesday.
“Passenger aircraft obviously are suspended until further notice or significantly impaired until further notice, but this is creating a pilot training bubble and the company, if you’ve listened to them, has done a great job articulating that the pilots that are furloughed and that are going to come back still need training while they’re off and when they come back,” he said.
“Not only that, the ones that leave the industry permanently — and this was happening with demographics anyway but it’s going to be accelerated because of COVID — it bumps everybody to different planes, and when you move to a different plane you need more training than just your ongoing flight training for the aircraft you’ve been flying for years,” Bushell said.
Interested investors may want to keep their eyes peeled for CAE’s next quarterly report on November 10. The company broke the bad news in August with its fiscal 2021 first quarter results which showed revenue down by 33 per cent year-over-year to $550.5 million and a net loss attributable to shareholders of $110.6 million or $0.42 per share. That compared with a profit of $63.2 million or $0.24 per share a year earlier.
CAE said “the full brunt” of the pandemic hit the company during its fiscal Q1 with sharply lower demand and major disruptions in its operations. The company reported half of its global training network either closed or at reduced usage over the quarter for a combined usage in the 20-per-cent range, while the company’s Defence and Healthcare segments also faced disruptions.
At the same time, management was upbeat looking forward, with CAE trying to stay nimble by leveraging virtual reality and distance learning.
“The worst of the pandemic’s impacts on CAE may now indeed be behind us; however, the pace of recovery is unlikely to be linear or quick, and it will most certainly be dictated by the rate at which travel restrictions and quarantines can safely be lifted and economic activity improves. We continue to view the current fiscal year as a tale of two halves, with the first half of the year marked by lower demand and disruptions, and the second half, to potentially begin to inflect more positively. With that, we continue to expect free cash flow to turn positive in our second half of the fiscal year,” said president and CEO Mark Parent in an August 12 press release.
The stock had been on a high leading up to COVID-19 but like the airline industry as a whole, CAE dropped hard in February and March and has yet to mount a sustained recovery. Currently at $23 and change, the stock is down 31 per cent year-to-date.
“CAE is not paying a dividend right now, although I think they will reinstate their dividend next year at similar levels to where they suspended it this year, and that would equate to somewhere between a three and four-and-a-half percent dividend yield depending on where the shares are trading,” Bushell said.
“So, I think CAE is a great risk-reward at these levels. It may get worse before it gets better here this winter, so just buy a partial position,” he said. “But I stepped in about $19 for clients and so far so good.”
This year has put a dent in CAE’s reserves, to be sure, with the company sitting at the end of its fiscal Q1 (June 30) at $363.3 million in cash and equivalents compared to $946.5 million at the end of the previous quarter. The company’s restructuring program will cost $100 million, although management predicted the result would be $50 million per year in savings down the road.
CAE also reported in August that its Defence pipeline is staying strong, with about $5 billion in bids and proposals pending customer decisions. The Defence segment saw a revenue decline of 13 per cent year-over-year during the fiscal first.
So far, analysts seem to be mixed on the name, with a smattering of Hold and Buy recommendations of late. BMO Capital Markets, for example, took CAE from “Market Perform” to “Outperform” in an update on September 30, with analyst Fadi Chamoun saying CAE should pull out of the pandemic in a stronger position. Chamoun raised his target from $23.00 to $25.00, which at press time represented a projected return of 28 per cent.
For a contrasting perspective, Canaccord Genuity’s Doug Taylor projected a one-year target of $23.00 and went from “Buy” to “Hold” in an October 29 report, saying he needs to see more visibility on growth.
“We have nudged our near-term estimates slightly lower, noting some near-term risk around the large number of pilot furloughs globally. The uncertainty around near- and medium-term utilization rates for the civil aviation training business, combined with a robust share price performance, lead us to take a more cautious stance,” Taylor wrote.