Canada’s Aerospace Boom: The TSX Stock I’d Buy and the Price I’d Pay

CAE is one of Canada’s leading aerospace stocks trading at attractive valuations as momentum ramps up.

Key Points
  • CAE Inc. (TSX:CAE) stock is down over 25% this year despite a record $10.7 billion defense backlog driven by surging NATO spending and global geopolitical tensions.
  • The company is executing a transformation plan targeting $125-150 million in annual cost savings by 2030 through productivity improvements and operational efficiency.
  • CAE's civil aviation and defense segments are both benefiting from strong secular growth trends.

Geopolitical tension and aggression have heightened the real and perceived need for protection and sovereignty. CAE Inc. (TSX: CAE) and other TSX aerospace stocks in Canada are seeing record demand as a result.

CAE’ s stock price has fallen more than 25% since the beginning of the year. Yet, its backlog is rapidly rising. Moreover, the company is beginning to see the benefits of its transformation plan, and this TSX stock is trading at attractive multiples.

Let’s take a look.

Woman in private jet airplane

Source: Getty Images

A TSX stock benefiting from the turmoil

The turmoil in the world is a disappointing reality. But living in this reality means that countries must be in a position where they are ready to defend themselves, militarily, financially, and otherwise.

This is where aerospace companies like CAE come in. CAE operates in two segments. The first is the civil aviation training segment, which is the largest training network in the world. The other is the defence and security segment, which provides training centres to its global defence and security customers.

In the last five years, CAE’s stock price has stalled due to its underperforming civil segment. But today, CAE is finally seeing hope for a recovery amid rising defence spending and a plan to transform the business.

For example, the company is on track to achieve $125 million to $150 million in annual run-rate cost savings by the year 2030. This will come from increased labour productivity, a 17% reduction in square footage, and from operational improvements.

The renewed focus is on returns – return on capital, margins, cash flow generation, and profitability. These efforts will drive returns and free cash flows higher.

In the civil business, the main long-term drivers remain strong. Despite some cyclicality, this business continues to benefit from durable, long-term aviation demand growth.

This is happening as air travel continues to expand and higher aircraft deliveries continue to require more of CAE’s training services and simulation products. CAE is rationalizing its global network, which will contribute to achieving the annual costs savings that the company is targeting.

In the defence and security business, the company is benefiting from a generational upturn in defence spending globally, especially in NATO countries. This means that this segment has been busy, with a strong backlog and a growing list of opportunities. In fact, CAE’s defence and security backlog currently stands at $10.7 billion, with upside when recent acquisitions close.

The bottom line

In my view, CAE is a TSX aerospace stock that’s really setting up for a nice rally.  This will be driven by strong industry fundamentals as well as CAE’s renewed focus on maximizing returns. At this time, CAE’s stock trades at 27 times this year’s expected earnings and 23 times next year’s expected earnings. I think that earnings growth rates will accelerate, and that the price that investors are willing to pay for one of Canada’s leading aerospace stocks, CAE stock, will rise.

I’d be a buyer of this TSX stock at the $34 level, and I’d add if it goes lower.

Fool contributor Karen Thomas has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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