CAE Inc (CAE.TO)

(Note short timeframe.)  Attributes underpinning her recommendation are still there. Pilot shortage. Revenue is still consistent, stable, growing. Struggled on defense side, margins have come off, but geopolitical tensions are still high. Signed 25-year, $11B contract in May; services still in demand.

We would caution against reading too much into a couple of days' trading activity. CAE has had potential and a large backlog for some time, but it has not been able to execute well. It is down 21% over a year, and is still not really cheap at 21X earnings. Its last quarter was OK but not overly compelling. We would be OK continuing with an already-established clean up program. 
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The flight simulator business is an attractive one and CAE has a competitive advantage in that space. However with delivering planes being a challenge recently, there are not as many pilots needed.

Difficulty with defense side, longer-term contracts crimping profitability, those will wind down in 2025. Signing more profitable contracts in the meantime. Likes it. Very well run. Not a lot of similar companies, so shares usually trade at a premium. Market-average profitability, pretty strong balance sheet.

Geopolitical conflict begets defense spending. Airline travel was one of the key drivers of the elevated CPI print yesterday, so pilots will continue to be in demand. He'd buy here, and add more on weakness.

The training part is good but It is down because of the defense side. However since it was picked it announced an 11 billion dollar contract with the Royal Canadian Airforce over the next 25 years to train pilots. She would still buy it today.

 We would say CAE's major competitors are other large aerospace/defense players who all have some varying degree of involvement in the aircraft simulation space. Companies like LHX, LMT, BA, and GD all have varying involvements in the simulations space. We think CAE's moat is still wide as the civil business has been strong over the long-term. The obvious mistake that can be point towards is the acquisition of the defense segment which has mainly created problems. The company has struggled to clear legacy contracts associated with this segment off its books for a while now causing margin pressure. Once the legacy contracts are cleared, CAE should see nice growth and margin improvements in defence but management stated that this could take six-to-eight quarters to occur in recent earnings. This was the major reason for removing CAE from the model portfolios. Additionally, in our flash report from Feb 2023 we noted its outlook was quite strong, but in our most recent report, guidance on margins started to wane, and this caused us to take a more cautious approach. Selling CAE also provided us with the opportunity to reduce our already high exposure to industrials and add to a smaller sector exposure, materials

At the time of report writing we felt a B+ was still warranted on the strength of the civil segement and that the defense segement had room for improvement this year. In light of recent earnings, we would like to see how defense performs this year and a potential downgrade is on the table.
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Weighed down by 8 legacy contracts, which management is trying to exit. That would help with margins. Turnaround will probably take a few quarters. If successful, growth around 19%. Not cheap at 22x. Better risk/reward elsewhere.

Problem is that many contracts they signed with airlines don't adjust to inflation so this is squeezes margins. New contracts will reflect inflation. He likes their business model, likes it long term.

It is oversold but there is more and more demand for their products with many new pilots needing training.

It stopped paying a dividend during the pandemic but could re-instate it. There is a pilot shortage and it is estimated that 264 000 new pilots will be needed by 2029. All will need training and simulation exercises, as well as the cabin crews in safety training, etc.  Also consider that pilots work their way up, starting with regional jets and progressing to larger ones so constant training will be needed, which means that there will be a constant stream of income for CAE. It is the biggest flight simulator and training company in the world.  There is also a defense sector which you are getting basically for free.      Buy 11  Hold 1  Sell 1

EPS of 27c beat estimates of 21c; Revenue of $1.089B beat estimates by 3%. EBITDA of $229M beat estimates by 2.4%. Three brokers lowered targets. Civil aviation was strong but the defense sector experienced lower than expected results and margin pressure. Defense margins were guided to mid-single-digit, vs consensus of 6% to 7%. Revenue rose 9.6%. Backlog did grow 11% to $11.8B. Not great results, but we think still worth keeping for its backlog and a potential growth recovery, which expected in 2024, based on consensus estimates. 
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Good move to spin off medical simulation division. Room to run. Pilot shortage. Baby boom is still in revenge travel mode. Air Emirates just ordered Boeing planes. All tailwinds from a secular point of view.

Good managers. Usually trades at a premium. Long-term story is strong. Geopolitics will encourage sales in defence planes (flight simulators). Profitable and ROE needs to improve, though. Enjoys pricing power. Won't buy because the valuation is high.

Will continue to fly. With all costs so high, simulators allow pilots to remain current at reduced cost. Will expand over time. Greying of the pilot employee pool, and CAE will capitalize on the needed increase in training.

Explosion in aviation, pilot shortages, need for training. Incredible amount of demand for simulators. Commercial side has been strong. Cost hiccups have been an overhang on the defense side, and this is getting tidied up. A matter of time before it gets a higher multiple, due to quality of the business and recurring revenue. Strong backlog. No dividend.