A few years from now, you might look back and wonder why you didn’t jump on CAE (TSX:CAE) while it was still flying under the radar. The company, known for its cutting-edge simulation and training services in aviation, defence, and healthcare, has quietly positioned itself as a long-term winner. Though CAE stock has seen its share of ups and downs, the current valuation doesn’t seem to reflect the strength of its business or the opportunities ahead.
Source: Getty Images
The numbers
CAE stock’s recent earnings paint an interesting picture. The company reported revenue of $1.07 billion for the first quarter of fiscal 2025, a 1.7% increase from the same period last year. The Civil Aviation segment led the way, generating $587.6 million, up 9% year-over-year. Meanwhile, the Defence segment brought in $484.9 million, marking a 3% rise. These gains came despite a tough economic backdrop, showing how resilient CAE’s business model really is. Yet, the market didn’t seem all that impressed, likely because of the dip in operating income. This fell to $18.8 million from $22.7 million the year before. This decline, however, wasn’t due to operational weakness but rather to costs associated with the integration of Sabre’s AirCentre – a major acquisition aimed at expanding CAE’s airline operations portfolio.
The AirCentre acquisition, while expensive upfront, is expected to be a game-changer. It enhances CAE’s offering for airline clients. Allowing it to optimize operations with more sophisticated scheduling, crew management, and flight planning solutions. The company has indicated that these integration costs should ease by the end of the first half of fiscal 2025, meaning investors might soon see healthier margins as the benefits start to materialize.
Beyond the acquisition, CAE stock’s record-breaking $18 billion order backlog as of September 2024 tells its own story. That’s a 50% increase from the previous year, underlining the strong demand for CAE’s training solutions. With the global commercial aircraft fleet expected to double over the next two decades and a wave of retirements hitting the pilot workforce, the need for high-quality training is only going to grow.
Considerations
Financially, CAE stock does carry a bit of leverage. Net debt at the end of the first quarter stood at $3.1 billion, resulting in a net debt-to-adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of 3.4 times. While some investors might see this as a red flag, it’s worth noting that CAE stock’s strong cash flow generation of $789 million should make it easier to chip away at that debt.
Market sentiment around CAE stock has been mixed, which is partly why the stock still trades at what looks like a discount. Shares have climbed 37% since November 2024, reflecting a recovery from earlier lows. Yet they’re still down about 6% year-to-date as of February 2025. That kind of volatility might scare off some investors, but for those with a long-term horizon, it presents an opportunity. When a company with a dominant market position, growing revenues, and a record order backlog trades below its historical valuation multiples, it is often a sign that the market hasn’t fully caught on.
Looking ahead, CAE stock’s prospects seem solid. The company is investing heavily in digital training solutions and immersive technologies, staying ahead of industry trends. Its focus on sustainable aviation practices, including electric aircraft training, further strengthens its long-term appeal. Defence contracts, another key revenue stream, remain strong, with governments worldwide prioritizing military readiness amid ongoing geopolitical tensions.
Bottom line
Ultimately, the current dip in CAE stock’s price seems more like an opportunity than a warning sign. The business fundamentals remain strong, the order book is overflowing, and the company’s leadership in simulation and training gives it a competitive edge that’s hard to beat. While the stock might not shoot up overnight, the long-term trajectory looks promising. A few years from now, you might just wish you’d bought it while it was still flying under the radar.
