CAE Inc. (TSX: CAE)(NYSE:CAE) and Morneau Shepell Inc. (TSX:MSI) are soaring to new highs with one-year returns of 21% and 27%, respectively.
As a global leader in simulation technology and training services, CAE has come a long way, building a strong moat around its global business and capturing 33% of the civil aviation training solutions market, almost 10% of the defence and security market, and making progress in simulation-based training in healthcare.
The company’s operating income has increased from less than $150 million in 2001 to $400 million in 2017 for a compound annual growth rate of 6.55%, and the company’s backlog currently stands at $7.5 billion.
CAE is facing a bright future, with large, growing end-markets, increasing visibility, and room to increase market share in its different markets.
Cash flows are rising steadily, as the proportion of revenue that is recurring continues to increase. In the latest quarter (the second quarter of fiscal 2018), operating profit increased 43%, and free cash flow more than doubled to $63.5 million.
In 2018, management expects continued growth in all segments, with low double-digit growth expected in the Civil segment, as air traffic continues to grow, a mid to high single-digit growth rate in the Defence segment, and continued growth in Healthcare, where increasing adoption of simulation-based training will drive management’s expected long-term double-digit growth rate.
All in all, CAE continues to be a solid holding with strong tailwinds driving its growth going forward.
Morneau Shepell is another quality company that has built a solid footing and competitive advantage for itself.
It is a human resources consulting and technology company which has helped companies across North America to better manage costs and enhance the strength of their organizations.
Morneau Shepell has grown via acquisitions and organically, with nine acquisitions completed since 2014.
With strong cash flows supporting a dividend yield of 3%, and a growth strategy that includes a U.S. expansion, 2018 should be another strong year for the company and thus its shareholders.
The Canadian business is seeing steady growth, while the U.S. business has been delivering double-digit growth.
Morneau Shepell is benefiting from companies increasingly outsourcing their human resources function as well as from the fact that most of the revenue is recurring.
Strategies to increase employee productivity are top of mind these days, and Morneau Shepell has the intellectual capital to address this issue, which can make a big difference if it is done successfully.
The stock, as well as the company’s financial performance, has been steady and reliable — a good thing in a market that is increasingly volatile.
