The outlook for Canada’s software market is bright. According to Statista.com, the market volume will reach US$26.4 billion by 2028 based on projected annual revenue growth of 4.5% from 2024 to 2028.
If you want to invest in likely beneficiaries, CAE Inc. (TSX: CAE) and Enghouse Systems Limited (TSX: ENGH) are the names to watch this year. Both are undervalued stocks but well-positioned to deliver hefty gains to prospective investors.
Multi-year growth potential
CAE operates globally and caters to the civil aviation, and defence and security sectors. The $8.2 billion high-technology company deploys software-based simulation training and critical operations support solutions. In the U.S., this Saint-Laurent, Quebec firm is a fixture in the government contracting industry.
The Civil Aviation segment boasts the most extensive training network in the world. It provides comprehensive training solutions for pilots, cabin crew, maintenance technicians, and ground personnel. Users are in commercial, business, and helicopter aviation and the emerging electric vertical takeoff and landing (eVTOL) markets.
CAE’s Defence & Security segment serves global defence and security customers. In addition to North America and Latin America, it has regional operations in Europe, Africa, the Middle East, and Asia-Pacific. The business unit develops and delivers integrated live, virtual, and constructive (LVC) training solutions for defence forces.
“We have considerable headroom for growth in the civil aviation market, and our continued positive momentum underscores the strong demand for CAE’s highly differentiated training and flight services solutions,” said Marc Parent, CAE’s President and CEO. He adds the company can win a significant share in a sizeable secular growth market.
In Q3 fiscal 2024 (three months ending December 31, 2023), revenue grew 13% to $1 billion versus Q3 fiscal 2023, although net income decreased 28% year-over-year to $56.5 million. Parent said the quarterly performance reflects strong underlying demand for CAE’s Civil market solutions and ongoing transformation of the Defence business.
Because of favourable secular trends across the business segments, management sees growth potential over a multi-year period. CAE will pursue its growth strategy and deploy accretive growth capital to become bigger, stronger, and more profitable. CAE trades at $25.86 per share (-9.58% year-to-date).
Rare gem
Enghouse Systems is a rare gem because this tech stock pays quarterly dividends. At $33.74 per share (-3.26% year-to-date), you can partake in the decent 2.45% dividend. Market analysts’ 12-month average price target is $39.33 (+16.6%).
The $1.9 billion firm from Markham, Ontario provides enterprise software solutions to clients in various vertical markets. Enghouse is continually growing internally and through acquisitions. The operating cash flows from its core group segments (Interactive and Asset Management) fund its growth strategy.
In Q4 fiscal 2023 (12 months ending October 31, 2023), revenue, recurring revenue, and operating profits rose 13.9%, 35%, and 7.9% respectively to $123.1 million, $87.2 million, and $35.7 million versus Q4 fiscal 2022. The annual Software-as-a-Service (SaaS) and Maintenance services revenue reached a record $297.6 million in fiscal 2023.
Management said the company had $240.4 million in cash reserves and zero external debt at year-end. Enghouse will actively pursue opportunities and strategically deploy cash reserves on acquisitions.
Tech treasures
Expect companies on the software side, not hardware, in the tech industry to benefit from a favourable market growth trend. CAE and Enghouse Systems are TSX’s tech treasures in 2024.
