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Topic: How To Invest

Best Canadian Stocks: Flight training specialist set to soar

Stock Investing

Every Tuesday we bring you “Best Canadian Stocks.” You get our specific recommendation on the stocks we profile, with a full explanation of how we arrived at our opinion. You’ll read about stocks making moves you should know about, from coverage in one of our three newsletters featuring Canadian stocks – The Successful Investor, Stock Pickers Digest and Canadian Wealth Advisor.

CAE INC. (Toronto symbol CAE; www.cae.com) gets 55% of its revenue by selling flight simulators and pilot-training services to commercial airlines. Another 40% comes from simulators and training for military clients, mainly in the U.S.

CAE gets the remaining 5% of its sales by making medical-simulation products, such as mannequins, for training nurses and medical students.

The company’s revenue rose 38.6%, from $1.5 billion in 2010 to $2.1 billion in 2014 (fiscal years end March 31). Earnings gained 25.0%, from $0.56 a share (or a total of $144.5 million) in 2010 to $0.70 a share (or $180.3 million) in 2012.

Costs to integrate an acquisition and improve the profitability of its military businesses cut CAE’s 2013 earnings to $0.53 a share (or $137.7 million). Earnings rebounded to $0.73 a share (or $190.0 million) in 2014.

CAE continues to spend a high 10% of its revenue on research, but it gets tax credits from the Canadian and Quebec governments, so its net research costs are closer to 3% of its total revenue.

Thanks to this spending, CAE now provides training on over 100 different civilian and military aircraft, including passenger planes, smaller business jets and helicopters. That gives it an advantage over many of its competitors, which tend to focus on just a few types of planes.


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Agreement with Japan Airlines continues expansion in foreign markets

The company recently agreed to form a 50/50 joint venture with Japan Airlines (JAL) that will train pilots for JAL and other airlines in northeast Asia, except China. Deals like this help CAE expand in unfamiliar foreign markets.

CAE can comfortably afford to keep investing in its operations. As of September 30, 2014, it held cash of $277.8 million, or $1.05 a share. Its long-term debt of $1.2 billion is 30% of its market cap.

The company stands to gain from several long-term trends, including rising demand for air travel as the global economy improves. The recent drop in oil prices will cut fuel prices and give airlines more cash to replace aging planes, which will spur demand for flight simulators and pilot training.

Governments continue to cut military spending in response to rising budget deficits. However, demand for CAE’s products and services should remain strong, as it costs up to 90% less to train pilots on simulators than in actual aircraft.

The company gets 90% of its revenue from outside of Canada, so the lower Canadian dollar should help increase its 2015 earnings to $0.78 a share. The stock trades at a reasonable 19.2 times that forecast. The $0.28 dividend yields 1.9%.

CAE is a buy recommendation of The Successful Investor.

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