CAE INC. $13 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 261.5 million; Market cap: $3.4 billion; Price-to-sales ratio: 1.5; Dividend yield: 1.8%; 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 and now has over 100 flight schools in 30 countries.
Strong recovery after recession
The recession cut flight simulator demand, pushing down CAE’s revenue by 8.2%, from $1.7 billion in 2009 to $1.5 billion in 2010 (fiscal years end March 31). As the global economy recovered, CAE’s revenue rebounded to $1.6 billion in 2011 and reached $2.1 billion in 2013.
The sales decline during the recession cut CAE’s earnings by 16.5%, from $0.79 a share (or a total of $200.5 million) in 2009 to $0.66 a share (or $168.6 million) in 2010. Total earnings recovered to $169.8 million in 2011, but per-share earnings were unchanged at $0.66. Earnings then improved to $0.74 a share (or $191.7 million) in 2013.
CAE gets 55% of its revenue from commercial airlines. That adds to its risk, as this industry’s prospects are closely tied to the direction of the overall economy. However, many airlines are upgrading to newer planes, which will spur demand for CAE’s simulators and pilot-training services.
CAE has sold 33 flight simulators so far in fiscal 2014 and should sell over 40 for the full year.
Military clients account for 40% of CAE’s revenue. Defence cutbacks in the U.S. and Germany have hurt this business, and CAE cut jobs at its European operations in response.
New products cut risk
The remaining 5% of CAE’s revenue comes from new businesses that take advantage of its simulator expertise. For example, it now makes simulators to train paramedics and medical students.
CAE maintains its high market share by continually upgrading its products. In 2013, it spent $60.6 million (or 2.9% of its revenue) on research. It received additional government tax credits in 2013, which is why its research costs are down 3.5% from $62.8 million (or 3.4% of its revenue) in 2012.
Due to stronger competition in Europe and South America, CAE is relocating some of its flight simulators to pilot schools where demand is greater. That has pushed up its costs. However, it gets 90% of its revenue from markets outside of Canada, and the weaker Canadian dollar has increased the contribution of its overseas operations.
Earnings dip is temporary
Even so, CAE’s earnings will still probably fall to $0.67 a share in fiscal 2014. The stock trades at 19.4 times that estimate. Earnings could rebound to $0.81 a share in 2015. The stock trades at a more reasonable 16.0 times that forecast. As well, CAE recently raised its dividend by 20.0%. The new annual rate of $0.24 yields 1.8%.
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