Can CAE Shares Reach $20?

The stock has gained 50% in less than a year. How much runway is left?

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The Motley Fool

Very few Canadian companies can claim to be the world leader in their industry. But one company has consistently led its industry for years: CAE Inc (TSX:CAE)(NYSE:CAE). The company provides flight simulation products and services to airlines and militaries across the world.

In both of those end markets, CAE is the clear leader. The lead is especially large in emerging markets, where airline traffic is growing the fastest. For example, CAE has nearly a 70% share of installed simulators in both China and India, where airline traffic is growing by 8.4% and 7.0% respectively. This growth in airline traffic is creating a serious shortage of pilots, which will create even more demand for CAE’s services long-term.

As would be expected, CAE has been growing impressively. Net income in the most recent fiscal quarter came in at nearly $48 million, up 28% year-over-year. The company’s backlog eclipsed $4 billion, up nearly 20% from the year earlier. The stock has reacted accordingly, reaching $15 per share after trading below $10 at one point in April. But how much runway is left?

At $15 per share, CAE trades at over 22 times earnings. So clearly the market is recognizing the strong position that the company is in. Furthermore, 40% of revenues still come from militaries, whose budgets have come under pressure in recent years. And while aircraft orders from Airbus and Boeing (NYSE:BA) are at record levels, fortunes can turn in a heartbeat in the airline industry.

But the growth in worldwide aviation is very real, and CAE is one of the few companies poised to take advantage. Another option is Bombardier (TSX:BBD.B), but the aircraft maker has run into recent problems with its C Series jet, and only 52% of 2013 revenues were related to aerospace.

Foolish bottom line

Clearly the market is very optimistic about CAE’s future, and that optimism is warranted. But the company still faces a few headwinds, especially concerning military spending. Still, CAE is one of Canada’s few world champions of industry, and that should not be discounted at all.

And for Canadian investors who want to bet on the global airline industry, CAE might be the only realistic option.

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.

Fool contributor Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

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