Canada Says Aerospace Is Entering a Once-in-a-Generation Boom: 3 TSX Stocks I’d Buy

Canada’s defence boom is putting Montreal in the global aerospace spotlight, and three TSX names could ride the spending wave.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published September 22, 4:30 pm EDT

Canada might be looking at Toronto in the rearview, but Montreal is now dead ahead.

Apparently, the Canadian city belongs in the same aerospace conversation as Seattle and Toulouse. Which may help explain why the EU-Canada Summit looks as though it will take place in Montreal at the end of October.

That was one of the more striking messages from the Canada Investment Summit, where defence and advanced manufacturing received their own main-stage discussion. CAE Chief Executive Officer Matthew Bromberg described Montreal as the world’s “third most significant aerospace hub.”

The timing couldn’t be better. Bromberg called what’s happening in global defence a “once-in-a-generation increase in defence spending.” Allied countries need aircraft, communications systems, satellites, and the technology buried inside all of them.

“Trust and technology is what Canada brings to the future of defence,” Bromberg said.

For investors, that opportunity stretches well beyond the obvious aerospace names.

Young Boy with Jet Pack Dreams of Flying — Source: Getty Images

TSAT

Telesat (TSX: TSAT) is my highest-risk pick. Its Lightspeed low-Earth-orbit satellite network is being built for commercial customers, governments, and increasingly defence.

That defence opportunity suddenly became very real. Telesat recently secured a $2.3 billion contract with Canada’s Defence Investment Agency to provide secure Arctic satellite communications to the Canadian Armed Forces. Including options, the deal could reach $2.7 billion. The contract also expands Lightspeed from 156 satellites to 225.

That lines up almost perfectly with what Telesat Chief Executive Officer Daniel Goldberg said at the summit about secure satellite communications becoming strategically important to Canada and its allies. The catch is today’s business.

Second-quarter revenue fell 25% to $79 million while adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) dropped to $22 million as the older satellite business shrank and Lightspeed absorbed heavy investment.

Shares recently traded around $69, so this is not the steady aerospace pick. It’s the bet that tomorrow’s satellite network becomes much more valuable than yesterday’s business.

MAL

Magellan Aerospace (TSX: MAL) is the more traditional manufacturing play. The company builds aeroengine components, aerostructures and defence products for aircraft manufacturers and governments around the world. That’s exactly the capability summit speakers argued Canada should expand.

Magellan has already secured a Canadian government contract to develop domestic production of the M-72 light anti-tank weapon. It also signed agreements involving potential fighter-engine sustainment and submarine-related defence work.

The financial momentum is encouraging. Second-quarter revenue jumped 22% to $306 million, while net income climbed to $19.8 million from just $5.4 million a year earlier. At around $34 per share, Magellan trades near 22 times forward earnings.

The shares have already rallied sharply, and aerospace programs can be slow and expensive. Still, if Ottawa wants more defence production staying inside Canada, Magellan already owns the factories.

FTG

My smaller-cap pick is Firan Technology Group (TSX: FTG). FTG makes electronic products and subsystems used in aerospace and defence, including cockpit equipment and specialized circuit boards. In other words, it sells the less glamorous pieces aircraft still can’t fly without.

Second-quarter bookings surged 89% year over year to $86.7 million, while backlog reached $193.5 million. Aerospace revenue itself increased 21%. FTG finished the quarter with net debt of just $2.9 million, leaving the balance sheet in good shape as demand grows.

Shares recently traded around $21, or roughly 25 times forward earnings. That’s not especially cheap for a small manufacturer, and the business depends heavily on aerospace production schedules. Yet record bookings suggest customers are already placing orders before the broader defence cycle fully plays out.

Bottom line

Canada’s aerospace opportunity isn’t simply about who builds the next jet. Telesat provides communications from orbit. Magellan manufactures critical hardware. FTG supplies the electronics buried inside aircraft and defence systems.

If Bromberg is right about a once-in-a-generation spending cycle, some of the most interesting winners may be the companies supplying everything behind the headline aircraft.