CAE INC. (Toronto symbol CAE; www.cae.com) is the world’s leading maker of flight simulators for commercial airlines, with 70% of the market. It also makes simulators for military clients. The company began training pilots for its customers in 2001 and now has over 100 flight schools in 30 countries. The recession cut flight simulator demand, pushing down CAE’s revenue to $1.5 billion in 2010 (fiscal years end March 31). As the global economy recovered, CAE’s revenue rebounded to $1.6 billion in 2011 and reached $2.1 billion in 2013. The sales decline during the recession cut CAE’s earnings to $0.66 a share (or $168.6 million) in 2010. Total earnings recovered to $169.8 million in 2011, but per-share earnings were unchanged at $0.66. Earnings then improved to $0.74 a share (or $191.7 million) in 2013. CAE gets 55% of its revenue from commercial airlines. Many airlines are upgrading to newer planes, which will spur demand for CAE’s simulators and pilot-training services. CAE has sold 33 flight simulators so far in fiscal 2014 and should sell over 40 for the full year. Military clients account for 40% of CAE’s revenue. The remaining 5% of CAE’s revenue comes from new businesses that take advantage of its simulator expertise. For example, it now makes simulators to train paramedics and medical students.
Canadian stocks: CAE raises dividend by 20% for a yield of 1.9%
CAE maintains its high market share by continually upgrading its products. In 2013, it spent $60.6 million (or 2.9% of its revenue) on research. It received additional government tax credits in 2013, which is why its research costs were down 3.5% from $62.8 million (or 3.4% of its revenue) in 2012. Due to stronger competition in Europe and South America, CAE is relocating some of its flight simulators to pilot schools where demand is greater. That has pushed up its costs. However, it gets 90% of its revenue from markets outside of Canada, and the weaker Canadian dollar has increased the contribution of its overseas operations. CAE recently raised its dividend by 20.0%. The new annual rate of $0.24 yields 1.9%. In the latest edition of The Successful Investor, we look at the risk of CAE’s strong reliance on the cyclical commercial airline industry as well as the potential impact of defense cutbacks in the U.S. and Europe on the company’s military business. We also look at CAE’s earnings outlook for 2014 and 2015. We conclude with our clear buy-sell-hold advice on the stock. (Note: If you are a current subscriber to The Successful Investor, please click here to view Pat’s recommendation in the latest issue. Be sure to log in first.) If you’re a member of Pat’s Inner Circle and you’d like to ask a question about today’s article, please go to the question page reserved for you (be sure you’re logged in first). Click here to ask your question. COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members With its flight simulation and training business, CAE is one Canadian company with a unique niche market which it dominates, in Canada and internationally. Do you have examples of similar Canadian stocks that are well ahead of the competition, or have very little competition, in their fields? Do you believe stocks with a strong niche market make good long-term core holdings?
