CAE is a pandemic recovery play, this investor says

Airlines have always been a tricky play —highly cyclical and tied at the hip to fuel and labour costs— but for those convinced of the sector’s revival in a post-pandemic world, there’s a better option to be had in flight simulation company CAE Inc (CAE Stock Quote, Chart, News, Analysts, Financials TSX:CAE). So says Ryan Bushell of Newhaven Asset Management, who advises investors to buy CAE on the dip.

“We purchased CAE for our clients last fall before the news on the vaccine trials came out, at about $19 and then the shares have about doubled,” said Bushell, president and portfolio manager at Newhaven Asset Management, who spoke on BNN Bloomberg on Friday.

“It’s interesting as a dividend manager. This company used to pay a dividend and they suspended it last year, which does happen occasionally to companies in unforeseen circumstances, and the global pandemic certainly would count in that category,” Bushell said. “I expect them to reinstate their dividend, hopefully once they close this most recent acquisition they announced with L3Harris, which is a defence training company primarily in the United States.”

The US$1.05-billion acquisition of L3Harris Technologies’ Military Training business is now almost at the finish line, as CAE announced on Monday that the deal has passed regulatory muster and should be closing on July 2. First announced in March, the acquisition will essentially double CAE’s core military training business in the US.

“The Acquisition will also serve to broaden CAE’s ability to provide training and operational support solutions across multi-domain operations by diversifying CAE’s training and simulation leadership in the air domain, complementing land and naval training solutions, and enhancing CAE’s capabilities in space and cyber,” said CAE in a press release.

CAE’s share price has been riding a nice updraft over the past seven or eight months, with the L3Harris announcement in March helping spur the stock along. Since the start of October 2020, CAE has now climbed 87 per cent, an exemplary turnaround for a stock that plunged dramatically earlier last year when COVID-19 decimated the airline industry, among others.

All things considered, though? CAE did pretty good over the pandemic, as witnessed in its fiscal fourth quarter and year end financials delivered last month. There, CAE reported $3.0 billion in revenue for the 12 months ended March 31, 2021, compared to $3.6 billion for the previous fiscal year. Adjusted net income including government support programs was $127.1 million or $0.47 per share compared to $359.7 million or $1.34 per share a year earlier.

In his year-end comments, CEO Marc Parent said CAE showed resiliency across its business segments.

“In the face of the biggest-ever shock in the history of civil aviation and major disruptions across the defence and healthcare markets, CAE rebounded to quarterly profitability and positive free cash flow after only our first quarter,” said Parent in a May 19 press release.

“Our recovery momentum has continued into the fourth quarter with average training network utilization of 55 per cent and sequentially higher margins in Civil, order bookings to sales breaking above 1.1x in Defence, and record quarterly revenue in Healthcare,” he said.

The good news is Bushell says there’s going to be plenty of demand for pilot training from here on out.

“What you’ve seen during the pandemic is a complete reorganization of airline pilots and this was happening anyways with demographics, with older pilots retiring and newer pilots being trained and more capacity being added to the sector which is not happening now, obviously, but could return in the future with effective vaccines,” Bushell said.

“Every time a pilot retires who’s flying, let’s just say, a wide body 767-plus aircraft someone moves up to take that spot — well, they have to be completely retrained and the person who took their spot has to be retrained as well,” he said.

Bushell also thinks the business jet sector will see a marked uptick in the years to come, where CAE is an industry leader in training.

“The very wealthy, first of all, have not been affected by the pandemic, rightly or wrongly, and second of all, they have been forced to reconsider what a first class ticket costs versus flying privately, and I think the extra cost of flying privately versus the benefit in a post-pandemic world will be a different calculation and you will probably see some good business jet demand on the back of that as well,” Bushell said.

“For me, I think the company is really well set up. You’re paying for it now, though,” he said. “It’s not as cheap as it was, so every time it dips down to the low-$30s that’s when I buy a little more for a new client who’s come in.”

“But my existing clients hold their positions and I’m interested to see where it goes over the next year or two especially,” Bushell said.