CAE Inc.

CANADIAN PACIFIC RAILWAY LTD., $70.77, Toronto symbol CP, is our “Stock of the Year” for 2012. Next week, Stock Pickers Digest, our newsletter for aggressive investors, will reveal its #1 pick for 2012. We’ve had great success with CP since we recommended it in the first issue of The Successful Investor in January 1995. In October 2001 the old CP broke up into five separate companies: CP Rail, CP Ships, Fording Coal, Pan Canadian and Fairmont Hotels. In 2002, PanCanadian merged with Alberta Energy to form EnCana, which broke up into Encana and Cenovus in December 2009. All of these mergers and breakups unlocked significant shareholder value. Railways are highly cyclical. Unpredictable factors, such as weather, also add risk: in 2011, avalanches in B.C. and spring floods in the Prairies delayed CP’s trains and hurt its earnings....

CAE INC. $10 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 257.6 million; Market cap: $2.6 billion; Price-to-sales ratio: 1.5; Dividend yield: 1.6%; TSINetwork Rating: Average; www.cae.com) earned $38.4 million in the quarter ended September 30, 2011. That’s down 1.8% from $39.1 million a year earlier. Earnings per share were unchanged at $0.15 on more shares outstanding. If you exclude costs to integrate Medical Education Technologies, Inc. (METI), which CAE recently purchased for $130 million U.S., CAE would have earned $41.1 million, or $0.16 a share, in the latest quarter. METI makes medical simulators and other products for training paramedics and medical students. Revenue rose 11.7%, to $433.5 million from $388.0 million. METI contributed $7.1 million to the increase. In addition, demand for CAE’s flight simulators and pilot-training services continues to rise as airlines replace their aging planes with newer models....

CAE INC. $10 (www.cae.com) continues to benefit as airlines upgrade their fleets. It recently received an order from Emirates Airlines for two flight simulators. The $34-million value of this contract is equal to 2% of CAE’s annual revenue of $1.7 billion....

PLEASE NOTE: This is our last Hotline for 2011. Our next Hotline will go out on Friday, January 6, 2012. TRANSCANADA CORP., $44.05, Toronto symbol TRP, is buying nine solar-power projects in Ontario from Canadian Solar Inc. (Nasdaq symbol CSIQ). TransCanada will pay $470 million for these projects. That’s 12.7% more than the $417 million, or $0.59 a share, that it earned in the three months ended September 30, 2011....

ROYAL BANK OF CANADA $50 (www.rbc.com) reported record earnings for fiscal 2011 due to strong growth at its Canadian banking, wealth management and insurance divisions. That’s helping it offset slower growth at its securities-trading operations. In the year ended October 31, 2011, earnings per share rose 16.5%, to $4.45 from $3.82 in 2010. As well, loan-loss provisions fell 21.4%, as more people are repaying their loans on time. Buy. CAE INC. $10 (www.cae.com) continues to benefit as airlines upgrade their fleets. It recently received an order from Emirates Airlines for two flight simulators. The $34-million value of this contract is equal to 2% of CAE’s annual revenue of $1.7 billion. Including these new orders, CAE has sold 21 flight simulators in its 2012 fiscal year, which ends March 31, 2012. It sold 29 simulators in fiscal 2011, up from 20 in 2010. Best Buy. CENOVUS ENERGY INC. $34 (www.cenovus.com) reported that its cash flow per share rose 54.4% in the third quarter of 2011, to $1.05 from $0.68 a year earlier. A 9.6% increase in oil prices was the main reason for the gain. The stock trades at 8.0 times Cenovus’s forecast 2011 cash flow of $4.27 a share. That’s a reasonable multiple in light of its high-quality reserves. Buy.

CANADIAN NATIONAL RAILWAY CO. $79 (Toronto symbol CNR; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 444.8 million; Market cap: $35.1 billion; Price-to-sales ratio: 4.0; Dividend yield: 1.6%; TSINetwork Rating: Above Average; www.cn.ca) will buy back up to 5.65 million of its common shares from a private seller, at a discount to their market price. It aims to complete these purchases by March 2012. This is part of CN’s plan to buy back 17 million of its shares, or 3.8% of the total outstanding, by October 27, 2012. Share buybacks raise earnings per share and other per-share calculations, and give the remaining shareholders a larger stake in the company. CN Rail is a buy....

CAE INC. $9.67 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 257.2 million; Market cap: $2.5 billion; Price-to-sales ratio: 1.5; Dividend yield: 1.7%; TSINetwork Rating: Average; www.cae.com) makes military and airline flight simulators. It also runs pilot-training schools. CAE continues to apply its simulator expertise to new fields, such as medical training. It recently bought Florida-based Medical Education Technologies, Inc. (METI), which makes medical simulators and other products, including life-like mannequins, for training paramedics and medical students. Since 1996, METI has sold about 6,000 simulators to medical schools in 40 countries. This purchase will add $60 million U.S. to CAE’s annual revenue of $1.6 billion (Canadian)....

The slowing global economy will likely prompt airlines to spend less on new planes and simulators. However, both Bombardier and CAE operate other businesses that help diversify their operations and cut their exposure to the cyclical air-travel industry. BOMBARDIER INC. (Toronto symbols BBD.A $4.10 and BBD.B $4.01; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 1.7 billion; Market cap: $6.8 billion; Price-to-sales ratio: 0.4; Dividend yield: 2.4%; TSINetwork Rating: Average; www.bombardier.com) is the world’s third-largest commercial-aircraft maker, behind Boeing and Airbus. It is also the world’s largest passenger railcar manufacturer. In the three months ended July 31, 2011, Bombardier’s earnings rose 56.7%, to $210 million, or $0.12 a share (all amounts except share prices and market cap in U.S. dollars). A year earlier, it earned $134 million, or $0.07 a share. Sales rose 17.4% to $4.7 billion from $4.0 billion....

RESEARCH IN MOTION LTD., $21.36, Toronto symbol RIM, rose earlier this week on speculation that activist investor Carl Icahn is planning to buy a stake in the company.

Mr. Icahn has a long history of pushing companies to make changes that help increase shareholder value. In RIM’s case, that may involve splitting the company into two separate firms. One would sell BlackBerry smartphones and email servers to corporate clients, and the other would focus on consumer products. Icahn may also push RIM to increase its earnings by licensing more of its wireless technology patents.

The company’s two co-founders own 11% of the outstanding shares. That would hinder any radical changes. Still, Mr. Icahn’s involvement would draw investor attention to RIM’s value.

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CAE INC. $10 (www.cae.com) has won $100 million of new contracts. That’s about 6% of CAE’s annual revenue of $1.6 billion. Under these deals, CAE will build and service flight simulators and other equipment for the U.S. and German air forces. Demand for CAE’s products should continue to rise, because it costs much less to train pilots on simulators than on actual aircraft. As well, the company gets half of its revenue from military clients. That cuts its exposure to the cyclical airline industry. Best Buy. CENOVUS ENERGY INC. $34 (www.cenovus.com) has started up the third phase of its 50%-owned Christina Lake oil-sands project in Alberta; ConocoPhillips owns the other 50%. When it reaches full production in 2012, this phase will add 40,000 barrels a day to Christina Lake’s current daily production of 16,000 barrels. Future phases will push up daily production to 218,000 barrels. Buy. MOLSON COORS CANADA INC. $43 (www.molsoncoors.com) plans to invest an extra $280 million in its U.K. breweries over the next five years (all amounts except share price in U.S. dollars). These upgrades will cut these breweries’ power and water use. To put the cost of this plan in context, Molson Coors earned $231.6 million, or $1.23 a share, in the quarter ended June 25, 2011. Buy.