CAE Is Off To A Flying Start in 2013

Though shares of CAE don’t appear set to soar from current levels, this is a solid company that investors should keep an eye on for a pull back.

| More on:
The Motley Fool

CAE (TSX:CAE) announced this morning that it had secured more than $100 million in military contracts for the defense forces of 15 countries.  Included in this client list was the Israeli Air Force, UK Ministry of Defense, and NATO.  It was just last week that the company announced $95 million worth of deals that included the sale of seven full flight simulators and a series of training devices and simulator update services.  For a company that generated nearly $2 billion in revenues over the past 12 months, $200 million in contracts isn’t overly material, however, it provides an indication that CAE’s products and services remain in demand around the world.

The company’s focus is on helping train people to fly airplanes and helicopters of all shapes and sizes.  They do so primarily by providing market leading flight simulator technologies.  In addition, CAE offers a suite of ancillary training services related to the industry of flight (ie. cabin crew training, aircraft maintenance technician training).

Revenues have grown at a CAGR of 7% over the past 5 years and the company consistently rings through a return on equity of 15-16%.  Free cash generation is positive but not abundant, and though the balance sheet is perhaps a little heavy with debt (Total debt/equity = 119%), the company’s coverage ratios indicate that this is of little concern.  In addition, the stock offers a dividend yield of 1.9%.

Potential clouds

This is a very solid small/mid cap company in the Canadian market.  Somewhat of a rarity.  However, one of the knocks against CAE is its exposure to global defense spending which accounted for 49% of 2012 revenues.  In addition, though globally diversified, and growing in the parts of the world you’d expect (emerging markets), the U.S. and Europe contributed 34% and 30% of 2012 revenues respectively.  Spending, especially on defense, in these two major markets could face cuts in the coming years and this may have a negative impact on CAE.

CAE’s business model could however allow it to escape any spending cuts relatively unscathed as they are a low cost provider of flight training.  The cost of operating a flight simulator is a fraction of what an actual airplane costs to operate, and therefore, as budget cuts roll through, simulators may in fact take on a more prevalent role in pilot training.

Given the embedded cost advantage, it would be far easier to ignore the potential spending headwind if the stock was trading at a more reasonable valuation.  At a current P/E multiple of 17.9 and P/Book of 2.8, the company trades in line with 10 year averages of 17.8 and 2.5.  The stock appears fairly valued.

Foolish bottom line

CAE is a great example of company that exhibits sound fundamentals and a world leading product that would make a great addition to a portfolio, at the right price.  Even if spending cuts weren’t a potential issue, a quick look at CAE indicates it is fairly priced.  Throw the potential spending cut risk into the mix and the stock is perhaps on the expensive side.  Given these characteristics, this is a great company to sit on and wait for either the market to pull back or a company specific hiccup somewhere along the line.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler does not own shares in any of the companies mentioned in this report at this time.  The Motley Fool has no positions in the stocks mentioned above.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

Businessperson's Hand Putting Coin In Piggybank
Dividend Stocks

Build Your Retirement Fortune With These Top TFSA Stocks

Here are two top Canadian dividend stocks you can add to your TFSA to build wealth for retirement.

Read more »

Path to retirement
Dividend Stocks

Invest in These Stocks for a Worry-free Retirement Income Stream

Are you looking for an income stream that can pay you throughout your retirement? Then invest a portion of your…

Read more »

Male IT Specialist Holds Laptop and Discusses Work with Female Server Technician. They're Standing in Data Center, Rack Server Cabinet with Cloud Server Icon and Visualization
Tech Stocks

Could This Undervalued AI Company Be Canada’s Next Big Thing?

Open Text (TSX:OTEX) stock could be the next tech stock to surge from its use of artificial intelligence, making it…

Read more »

Dividend Stocks

Is BCE Stock Still a Top Telecom Investment in Canada?

Canada’s telecoms can provide growth and income in a defensive shell. Let’s see if BCE is still a top telecom…

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

2 Canadian Dividend Stocks I’ll Be Buying Hand Over Fist in June 2023

These two beaten-down Canadian dividend stocks could help you earn handsome returns on your investment in the long term if…

Read more »

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Dividend Stocks

If You’d Invested $10,000 in Loblaw Stock in 2012, Here’s How Much You’d Have Today

Loblaw stock had a crazy decade, with many huge moves. This could have created wealth from a $10,000 investment, but…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog

Retire Fearlessly: TFSA Stocks to Build Your Wealth Ahead of Time

Do you want to retire fearlessly? Invest your long-term capital in these extraordinary growth stocks in your TFSA.

Read more »

A worker overlooks an oil refinery plant.
Energy Stocks

Where to Invest in Oil Stocks in June 2023

Suncor Energy is a Canadian oil stock that's set up to benefit from strong oil prices, as it trades at…

Read more »