CAE Inc (CAE-T)

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

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.

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. 

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.

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.

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.

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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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. 

Sideways range for a while, but improving technically. Issue is that given we're late cycle, there will be headwinds next year. He'd stay on the sidelines. Better places to put $$ to work.

(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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