Robert McWhirter CAE Inc CAE-T TOP PICK May 15, 2015

Getting more into defense simulation, away from medical. Challenged by fixed-price contracts, but many are rolling off and will be renegotiated with inflation-escalator clauses. Has been volatile. Bright future. Holds it in client TFSAs. 

CAE EPS of 24c beat estimates of 19c; revenue of $1.13B beat estimates of $1.08B. Backlog is now a record $18B. We have liked the stock historically, but it has had lots of execution issues. It has high market share, but we always thought it should be more profitable overall, considering its moat and duopolistic industry with really just one other serious global competitor. We would consider 25X earnings fairly priced and would prefer an exit into something more reliable. 
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Operating margin gets hit by a lot of factors, not least of which is lumpy earnings from various segments. Demand for pilot training has been slower than hoped. Pickup on defense side, and those margins should improve.

Stock was down so much due to defense margins, it was like getting that part of the business for free. Q4 defense earnings showed a lot of improvement, and stock took off. Given the world today, likes exposure to defense.

The names on this list are plenty. Start with the industrials, for instance. He's a big fan of BBD.B, but they make everything here in Canada.

An aerospace name like CAE, the rails, auto components like LNR and MG.

World leader in flight simulation business. Strong company with recent performance in the stock market. Latest quarter has had a bit of a slowdown on sales, but overall the business is strong. Evolution of new pilots that will require new training will be good for business. Expecting high single digit revenue growth. Would recommend holding. 

He models 22% growth at 23x PE. Normally he'd like it, but it's had too big of a move from the fall. Not convinced it'll hit target numbers. Less exposed to tariffs.

They make simulators for both commercial planes and fighter jets. That's how he's playing increased defence spending in Canada.

Management did exactly what it said it was going to. Increased margins on the defense side from about 4% to 8%. All the geopolitical risk doesn't hurt. Both civil and defense segments now doing well.

Earnings good, guidance disappointed. But she takes a long-term view. One of the few stocks she owns with no dividend. Checked the boxes of recurring revenues, stable business. Still a pilot shortage in NA, geopolitical risks favour the defense segment.