CAE INC. $10 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 258.7 million; Market cap: $2.6 billion; Price-to-sales ratio: 1.4; Dividend yield: 2.0%; TSINetwork Rating: Average; www.cae.com) is the world’s leading maker of flight simulators for commercial airlines, with 70% of the market. It also makes simulators for military clients. The company began training pilots for its customers in 2001; it now has over 100 flight schools in 30 countries.
CAE gets 50% of its revenue from military clients. That cuts its exposure to cyclical commercial airlines, which supply 45% of its revenue.
New markets have big potential
The remaining 5% of CAE’s revenue comes from new businesses it has developed in the past few years. For example, it now makes simulators to train paramedics and medical students. The company has also developed simulators that help mining companies train employees to operate complex drilling machines.
CAE’s revenue rose 16.8%, from $1.4 billion in 2008 to $1.7 billion in 2009 (fiscal years end March 31). However, revenue fell 8.2% in 2010, to $1.5 billion, because the recession cut flight simulator demand. As the global economy recovered, CAE’s revenue rose to $1.6 billion in 2011 and $1.8 billion in 2012.
Earnings rose 23.4%, from $0.64 a share (or a total of $163.4 million) in 2008 to $0.79 a share (or $202.2 million) in 2009. The lower sales from the recession prompted CAE to cut jobs. Severance and other costs pushed down its earnings to $0.56 a share (or $144.5 million) in 2010. Earnings recovered to $0.62 a share (or $160.3 million) in 2011 and to $0.70 a share (or $180.3 million)in 2012.
Research spending will spur growth
CAE spent $62.8 million (or 3.4% of its revenue) on research in 2012. That’s up 41.1% from $44.5 million (or 2.7% of revenue) in 2011. This spending helps the company maintain its high market share. CAE is also using acquisitions to expand. In May 2012, it paid $281.9 million for Oxford Aviation Academy, which operates flight schools in the U.K., the U.S., Australia, Denmark, Norway, Sweden and Hong Kong. These schools also train cabin crews and maintenance personnel.
The company borrowed the money it needed to buy Oxford. That pushed up its long-term debt to $1.0 billion as of June 30, 2012, but that’s still a manageable 38% of its market cap. Moreover, CAE now feels that combining Oxford with its existing operations will save it $22 million a year, up from its original estimate of $15 million.
Profiting from new planes
The stock trades at 13.2 times CAE’s likely 2013earnings of $0.76 a share. Earnings should continue to rise as airlines upgrade their aging fleets, which will spur demand for CAE’s pilot-training services. That would also give CAE more room to raise its dividend. The current annual rate of $0.20 a share yields 2.0%.
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