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CAE is my Top Pick for the year ahead, this investor says

CAE

The stock may be flat this year but investors are likely to find both good value and growth potential in flight simulation company CAE Inc (CAE Stock Quote, Charts, News, Analysts, Financials TSX:CAE), according to portfolio manager Greg Newman, who just pegged CAE as one of his top picks for the next 12 months.

CAE makes simulation tech and training services for the airline, defence and healthcare sectors and has training facilities in 35 countries worldwide. The company saw its business suffer during the pandemic, with commercial air travel virtually shut down and airlines themselves in a tailspin. 

This time last year, CAE reported revenue down 33 per cent for its fiscal first quarter 2021 and an operating loss of $110.3 million, as the company’s training centres as well as manufacturing faced major disruptions.

A year later and CAE’s numbers look a lot better, with revenue up to $752.7 million, operating income of $86.2 million and adjusted EPS of $0.19 per share. The analyst consensus was for $765.4 million in revenue and EPS of $0.17 per share.

CAE’s Q1 2022 topline is still below pre-pandemic numbers, where the company had hit $825.6 million for its fiscal first 2020, but management is now more positive on the second half of the current calendar year.

In his quarterly commentary, CAE President and CEO Marc Parent pointed to progress made by the company on a number of fronts, including signing new airline training agreements, winning new defence contracts that expanded its customer base in that segment.

 “Our positive momentum continued into the new fiscal year and I am pleased with our strong first quarter performance, punctuated by 37 per cent year over year revenue growth and $0.19 of adjusted earnings per share,” said Parent in an August 11 press release.

“We expect continued strong year over year growth in fiscal year 2022, as recovery takes hold in our end markets, we integrate our recent acquisitions and ramp up our cost savings initiatives. The slope of recovery to pre-pandemic levels and beyond continues to depend on the timing and rate at which border restrictions can be safely lifted and normal activities resume in our end markets and in the geographies where we operate,” he said.

An $11.6 billion market cap company, CAE’s share price plummeted in the early days of COVID and didn’t really start picking up until late last year. Now trading for the past six months in the $35-$40 range, the stock has made up all of the lost ground, but Newman thinks there’s more upside from here.

“It’s a safer play on the global aviation recovery. People are trying to play Air Canada [but] I think CAE is a steadier business when you look at their end markets in defence, in security, in private business jets and commercial when they come back,” said Newman, speaking on BNN Bloomberg on Wednesday.

“The stock just pulled back on fresh [delta variant] concerns, and some higher short term capex which we think passes through,” he said. “It’s got a lot of nice upside here from their further capital deployment. They just bought L3 Harris military training which is nicely accretive in the low teens to the name.”

Newman said the fundamentals are looking attractive for CAE.

“I look for a name that is growing well relative to its price, and it’s trading around 25x 2023, which isn’t cheap, but it’s growing at around 36 per cent, we believe, between 2022 to 2024. So, all in, on a price to growth basis I think this name really sets up nicely for investors,” he said.

CAE closed in July on its milestone acquisition of the military training business from aerospace and defence giant L3Harris Technologies for US$1.05 billion. CAE said the deal will expand its ability to deliver training across varied systems as well as strengthen its position in the defence training sector. 

“The proposed acquisition represents a significant value creation opportunity for all CAE stakeholders. It accelerates our growth strategy in Defence and Security and is highly complementary to our core military training business, broadening our position in the United States,” said Parent in a March 1 press release.

“We are adding new customers, experience on new platforms and building our depth of expertise to address all domains – air, land, sea, space and cyber – as well as expanding into adjacent markets such as mission and operations support,” he said.

More recently, CAE signed a new five-year maintenance training agreement with Air Canada, putting CAE as Air Canada’s embedded “Transport Canada Approved Training Organization for Aircraft Maintenance and Engineering,” according to the company.

“CAE will implement many of its state-of-the-art digital training technologies, including training and qualifications management, virtual 360 aircraft environments and a new digital solution that will enable Air Canada to explore modern training environments such as evidence-based training,” the company said in a September 7 press release.

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.

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