CAE: Flight Simulators and Pilot Training

10/09/2019 5:00 am EST

Focus: TECHNOLOGY

Gordon Pape

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

CAE Inc. (CAE) is a world leader in flight simulators with over 9,000 employees. It has customers in 190 countries and 90% of its revenue is derived from international activities and exports, suggests Gordon Pape, editor of Internet Wealth Builder.

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 220,000 civil and defense, crew members and thousands of healthcare professionals.

Performance: The stock hit an all-time high of $36.86 in mid-May before retreating slightly to the current level. We have a capital gain of 70% since the company was added to our Recommended List in March 2017.

Montreal-based CAE missed revenue and profit estimates in its latest quarter, prompting the stock price to temporarily pull back. Revenue for the first quarter of fiscal 2020 came in at $825.6 million, up 14% from $722 million in the same period last year. Analysts had been looking for $846 million.

Despite the gains on the revenue side, net income was down 12% to $63 million ($0.23 per share) from $71.6 million ($0.26 per share) the year before.

On the good news side, the company reported order intake totaling $940.8 million and a backlog of $9.4 billion. Last year at this time the backlog was just over $8 billion.

Subsequent to the release of the quarterly results, CAE announced that it has entered into a strategic partnership with Directional Aviation Capital (DAC), one of the largest, fastest growing, and most innovative corporate aviation service companies globally.

As part of the deal, CAE will form a joint venture with DAC's affiliate, Volo Sicuro, LLC and will pay US$85 million a 50% stake in SIMCOM Holdings, Inc. In addition, DAC's affiliated business aircraft operators will enter into a 15-year exclusive training services agreement with SIMCOM and with CAE. 

The company is raising its quarterly payout by 10% to $0.11 per share, effective with the Sept. 30 dividend. This is the ninth consecutive year that CAE has raised its dividend. The yield at the new rate will be 1.3%.

Dennis Muilenburg, the very bright CEO of Boeing (BA) said recently he believes the growing shortage of pilots represents "one of the biggest challenges" facing the airline industry.

His company estimates that demand for air travel is growing so rapidly that 800,000 new pilots are expected to be needed over the next 20 years. Already some companies are cancelling flights because there are just not enough pilots to go around.

CAE, which operates internationally, is ideally positioned to take advantage of this growing need. The company has operations in three critical areas: civil aviation, defence, and healthcare. It should be one of the key Canadian growth stocks in the years ahead. Action now: Buy.

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