Soaring Demand for Flight Simulators

03/30/2017 2:50 am EST

Focus: GLOBAL

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

This is a great time to be in the defense industry. Donald Trump wants to ramp up military spending to the tune of US$54 billion plus he's putting pressure on all of America's allies to increase their own spending, notes Gordon Pape, editor of Internet Wealth Builder.

One of the companies that should benefit from higher defense budgets is Montreal-based CAE Ltd. (CAE). Founded in 1947, it has become a world leader in flight simulators. It now has customers in 190 countries and 90% of its revenue is derived from international activities and exports.

CAE has 160 sites and training locations in 35 countries, representing the world's largest installed base of flight simulators. Each year, the company trains more than 120,000 civil and defense crew members.

CAE's business is vertically integrated. It doesn't just sell simulators; it also provides training and aviation services, integrated enterprise solutions, in-service support, and crew sourcing.

One of the things I look for in assessing the future outlook for companies like this are new contract wins. Lately, CAE has had an impressive string of them.

In February, the company announced that it had been awarded a $200 million contract to support the Royal Canadian Air Force's Fixed-Wing Search and Rescue program. The deal is for 11 years and includes options to extend an additional 15 years that would take the value to more than $300 million.

In mid-January, the company announced a series of aviation training contracts valued at over $250 million. A couple of days before that, the company revealed deals for contracts worth more than $175 million to global military customers, including the U.S. and Australian navies.

The biggest deal of all this year was the January announcement of two long-term training services contracts with the United States Army and the Royal Canadian Air Force with a combined value of more than $1 billion, including options.

The contract with the U.S. Army is for a rotary-wing flight training classroom, simulator, and live flying instructor support services for one year with eight one-year options until 2026.

Even without those new awards, the company's backlog had been rising at an impressive rate. Since the beginning of 2016, CAE stock has been steadily trending higher, reaching a high of $20.72 in mid-February before retreating to the current level.

The shares pay a small quarterly dividend of $0.08 ($0.32 per year) to yield 1.6% at the current price. Action now: Buy. This company offers good growth potential and some modest income.

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