The share price of Montreal-based flight simulator and pilot training company CAE Inc. has gained 79 per cent from a recent low in August, 2024.Ryan Remiorz/The Canadian Press
CAE Inc.’s CAE-T share price has followed a volatile course over the past several years and is now approaching a nail-biting threshold: a record high.
Can it sail on through with new leadership and surging investor interest in defence spending?
The share price of the Montreal-based flight simulator and pilot training company, which has civil and defence operations, has gained 79 per cent from a recent low in August, 2024.
The sharp increase has brought the stock close to its peak in 2021 and suggests it is immune to this year’s tariff-rattling.
While that might be cause for celebration for anyone who has ridden the rally, it also comes with a burden: The stock has had a tendency to follow booms with demoralizing busts.
It fell 55 per cent during the COVID-related market meltdown in early 2020; nearly 50 per cent between November, 2021, and September, 2022, when supply chain issues were plaguing companies; and more than 30 per cent between September, 2023, and August, 2024, when investors freaked out over high interest rates.
CAE’s current boom rests on a few upbeat developments.
For one, its financial performance is encouraging. The company’s fiscal fourth-quarter revenues, for the period ended March 31, increased 13.2 per cent from the same period last year. Earnings nearly quadrupled, to 47 cents per share.
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CAE brought in $1.3-billion worth of new orders for flight simulators and training during the quarter, extending its backlog to more than $20-billion, up 65 per cent from last year.
A second explanation for the good times: The operating backdrop is terrific.
In an update last month, CAE said the airline industry will need 300,000 new pilots over the next decade. That’s up from an estimate of 285,000 new pilots in a previous forecast from 2023, suggesting that secular winds are blowing in the right direction.
Even better, defence stocks have soared this year as NATO countries, including Canada, plan to ramp up their military budgets. CAE’s defence division, which generated about 42 per cent of the company’s revenues last year, stands to benefit from this trend.
Lastly, CAE is making bold leadership changes that could take the company to the next level.
Calin Rovinescu, the former Air Canada chief executive officer and the guy widely credited for increasing profitability and efficiency at the airline, is now CAE’s executive chair.
And Matthew Bromberg will become CEO on Aug. 13. Mr. Bromberg hails from Northrop Grumman Corp. – it makes the B-21 stealth bomber, along with other sophisticated military hardware – which looks like the right background if CAE wants to fly with global defence giants.
“Both executives have a proven track record of creating significant stakeholder value at their respective prior organizations,” said Konark Gupta, an analyst at Bank of Nova Scotia, in a note last month.
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Add it up, and the case for the stock looks compelling.
CAE expects to generate fatter profit margins – or a greater share of operating income from its revenue – as it responds to rising demand for its services this year. Some analysts believe the improvements can persist well beyond 2025.
Within the civil division, margins were a respectable 21.5 per cent last year.
But this margin can expand to 25 per cent over the next three years with a strict eye on costs, more pricing power and higher utilization rates (more bums in seats) for the company’s training services, according to Kevin Chiang, an analyst at CIBC Capital Markets.
For similar reasons, he expects that CAE can expand margins within its defence division – where profits tend to be lower – from 7.5 per cent last year to 10 per cent within the next three years.
If CAE directs some of its cash flow to share buybacks, Mr. Chiang estimates the company can generate a profit of $2.18 per share by fiscal 2028, up from $1.21 per share in fiscal 2025. That’s an 80-per-cent increase in just three years.
As investors catch on to CAE’s improving growth profile, they might pay more for those earnings, which would translate into a higher earnings multiple on the stock – and a rising share price.
The stock recently traded at 10.5-times estimated EBITDA (earnings before interest, taxes, depreciation and amortization). But a richer multiple of 15-times EBITDA may be within reach, according to Mr. Chiang.
With CAE’s share price nearing a record high, there is good reason to be nervous about what comes next. But there are even more reasons to expect that the good times will persist.