CAE, Inc.

01/15/2015 7:00 am EST

Focus: STOCKS

Vivian Lewis

Editor and Publisher, Global Investing

One of my contributing analysts is Patti, the mother of an airline pilot trainee, and thanks to them, we have our more conservative Top Pick for 2015, explains Vivian Lewis, editor of Global Investing.

Patti's son's pilot courses are so crowded with future flyers taking off that he has to schedule work on the simulator machine at inconvenient times, late in the day or on holidays.

High-flying demand for flyers, particularly from Asia-based airlines, is being fed by new factors, like growing prosperity in the sprawling Asia region, new routes via the Middle East, and cheaper aviation fuel.

Our investment idea is to buy the Canadian maker of those over-booked flight simulator machines, CAE, Inc. (CAE).

The company reported new December simulator sales, C$ 100 million for civil aviation trainers for Iberia, and Greek, Turkish, and US carriers, and C$115 million for military helicopter and bomber trainers, for Germany and Poland.

For investors fearing government austerity, military sales are frightening. However, to block Vladimir Putin's aggressiveness, this year should see even more defense spending from NATO countries, and therefore, more simulator demand.

Another factor pushing down CAE is fear of flying after theAir Asia crash. But to get around in island-rich countries like The Philippines, Malaysia, and Indonesia, there is no alternative to airplanes.

In addition to pilot simulators, CAE also makes simulators for surgeons and medical personnel and for oil, gas, and mining operators. But the main business is aviation and some 120,000 pilots and crew are trained at CAE centers in 35 countries every year.

CAE is trading at a price/earnings ratio of 16.5x. It yields a modest 1.9% but this level has been raised 15% over the past five years.

It is expanding fast and although it has high debt at 45% of capitalization, the debt is cheap to service.

The average estimate for the stock price this year is $14.5, according to Zacks' poll of seven brokers, five of which rate CAE a buy or strong buy.

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