CAE Inc.

Oil has dropped from $74 U.S. a barrel in June to $60, and could fall further. We depend on resource industries more than the U.S. does, so the drop in oil and other commodities pushed down the Canadian dollar from $0.92 U.S. in May to $0.86 today. CAE INC. $6.68 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 255.1 million; Market cap: $1.7 billion; Price-to-sales ratio: 1.0; SI Rating: Average) stands to gain from both developments. CAE makes flight simulators and operates pilot-training facilities. Lower fuel prices leave its airline customers with more cash to spend on new simulators and training. Falling oil prices cut consumer costs, leaving more funds for travel....

MDS INC., $5.72, Toronto symbol MDS, is a life-sciences company that conducts contract-drug research for pharmaceutical companies, sells analytical devices (which scientists use to detect diseases) and supplies medical isotopes for cancer research. The company lost $17 million, or $0.15 a share, in the three months ended April 30, 2009 (all amounts except share price in U.S. dollars). The loss included a $16-million writedown of buildings and equipment at its drug-testing division. In the year-earlier quarter, MDS earned $13 million, or $0.11 a share. If you disregard the writedown and several other unusual charges, earnings per share fell 62.5%, to $0.03 from $0.08. That was well below the $0.06 a share that analysts were expecting. Revenue fell 19.4%, to $282 million from $350 million. Still, this was higher than the consensus estimate of $274.4 million. If you exclude the impact of foreign-exchange rates and the businesses that MDS bought and sold, its revenue fell 10%....

CAE INC. $7.03 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 255.1 million; Market cap: $1.8 billion; Price-to-sales ratio: 1.1; SI Rating: Average) makes flight simulators and operates pilot-training facilities. CAE trains over 75,000 pilots a year at 75 sites in 20 countries.

CAE gets about half of its revenue and earnings from highly cyclical commercial airlines. However, the remaining half comes from military clients, which cuts its risk. As well, steady revenue from long-term training contracts helps offset its reliance on new-simulator sales, which have slowed recently. CAE’s revenue rose 68.6%, from $986.2 million in 2005 to $1.7 billion in 2009 (CAE’s fiscal year ends March 31). Earnings soared from $0.19 a share (or a total of $46.9 million) in 2005 to $0.79 a share (or $200.5 million) in 2009. The gain was largely due to a successful restructuring plan, including the sale of its non-aviation businesses.

Research spending a hidden asset

The company continues to spend about 5% of its revenue on research. This lowers CAE’s earnings, but helps it compete with larger simulator makers, such as Boeing and Lockheed Martin.

CAE also plans to spend $714 million over the next five years to apply its expertise to new areas. For example, CAE’s high-resolution displays and simulation technology could help pilots take off and land in foggy or misty conditions. The Canadian government plans to provide up to $250 million in financing.

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AGRIUM INC., $56.82, Toronto symbol AGU, has increased the value of its hostile takeover offer for U.S.-based fertilizer producer CF Industries Holdings (New York symbol CF). This is the second time Agrium has raised its bid. Agrium is now offering $40 per CF share in cash (all amounts except Agrium’s share price in U.S. dollars), plus one Agrium common share. This raises the offer’s cash component by $5. Overall, the new offer is worth $4.2 billion, or 3.2 times Agrium’s 2008 earnings of $1.3 billion, or $8.34 a share. Agrium has a long history of growing through acquisitions, which increases its risk. Still, CF has appeal, as it would triple Agrium’s phosphate and UAN (urea and ammonium nitrate) fertilizer-production capacity. Developing countries, such as China, Brazil and India, will need fertilizer to increase crop yields as their populations grow. Moreover, fertilizer prices are low, and Agrium’s management believes that expanding now will put the company in a good position to profit when they rise again....

CAE INC. $7.25 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 254.9 million; Market cap: $1.8 billion; Price-to-sales ratio: 1.3; SI Rating: Average) makes flight simulators and trains commercial and military pilots. During its fiscal year ended March 31, 2009, CAE won $1.1 billion in military-related contracts, up 47% from the previous year. This is a new company record. CAE gets about 45% of its revenue and earnings from its military operations. This reduces its exposure to the airline industry, which has been struggling lately. CAE is a buy.

BOMBARDIER INC., Toronto symbols BBD.A, $3.39, and BBD.B, $3.32, has received a firm order for 20 of its new CSeries regional jets from Lease Corporation International Aviation (New Buildings) Limited. Lease Corporation is an Irish company that leases aircraft to Singapore Airlines, British Airways and other major airlines. The deal is worth $1.4 billion, and Bombardier will probably begin delivering the planes in 2014. (All amounts except share price in U.S. dollars) Moreover, Lease Corporation has an option to buy 20 more jets, though it will probably wait until it has received most of the initial order before it exercises the option. To put this contract in perspective, Bombardier earned $1 billion, or $0.56 a share, in the fiscal year ended January 31, 2009. That’s more than twice the $479 million, or $0.26 a share, it earned the previous year. The year-earlier figures exclude the writedown of an investment....

CAE INC. $7.00 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 254.9 million; Market cap: $1.8 billion; Price-to-sales ratio: 1.1; SI Rating: Average) is slowly expanding its sales outside the cyclical airline industry. It has won a 20-year, $329.5-million contract to build helicopter simulators and train pilots for Canada’s Department of National Defence. To put the contract in context, CAE’s annual revenue is about $1.4 billion. CAE has also teamed up with the Michener Institute for Applied Health Sciences in Toronto, the Universite de Montreal and the Winnipeg Regional Health Authority to develop medical simulators that will help train doctors to perform surgical procedures. CAE stands to make just $5 million from the deal, but the company feels that medical simulators could soon account for 10% of its sales. CAE is a buy....

CAE INC. $7.39 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 254.9 million; Market cap: $1.9 billion; Price-to-sales ratio: 1.3; SI Rating: Average) is a leading maker of flight simulators. It also provides pilot-training services in 20 countries. CAE gets 90% of its revenue from customers outside of Canada. The slowing economy could hurt simulator demand from airlines, which operate in a cyclical industry. However, CAE’s growing military operations help cut its risk. In fact, the company recently won several new military-related contracts worth a total of $80 million. Military operations account for 45% of CAE’s revenue. In its third fiscal quarter ended December 31, 2008, CAE’s revenue rose 23.1%, to $424.6 million from $344.8 million a year earlier. Earnings improved 32.9%, to $53.3 million from $40.1 million. Earnings per share rose 31.3%, to $0.21 from $0.16. CAE typically spends around 6% of its revenue on research....

The Canadian dollar will likely remain low relative to most major currencies for the next year or so. This is good news for CAE and Gennum, which get a high proportion their sales from the U.S. and overseas markets. (A low Canadian dollar enhances the contribution of international sales.) Their high research spending also makes them look less profitable than they really are. CAE INC. $7.39 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 254.9 million; Market cap: $1.9 billion; Price-to-sales ratio: 1.3; SI Rating: Average) is a leading maker of flight simulators. It also provides pilot-training services in 20 countries. CAE gets 90% of its revenue from customers outside of Canada. The slowing economy could hurt simulator demand from airlines, which operate in a cyclical industry. However, CAE’s growing military operations help cut its risk. In fact, the company recently won several new military-related contracts worth a total of $80 million. Military operations account for 45% of CAE’s revenue....

BCE INC., $26.12, Toronto symbol BCE, earned $1.8 billion in 2008, down 3.9% from $1.9 billion in 2007. Earnings per share fell 3.8%, to $2.25 from $2.34 on more shares outstanding. Revenue fell 0.3%, to $17.7 billion from $17.75 billion. These figures exclude restructuring charges, mainly job cuts, and other one-time items. The restructuring should cut BCE’s annual expenses by $400 million. BCE continues to lose traditional phone customers to cable companies and Internet-based phone services, but these losses are slowing. Meanwhile, BCE’s cellphone business is growing strongly; revenue rose 7.6% in 2008, and its subscriber base grew by 4.5%. The wireless division accounts for 25% of BCE’s revenue and 43% of its profit. Higher demand for BCE’s high-speed Internet and satellite-TV services helped offset lower revenue from its traditional phone services. Despite the lower earnings, BCE raised its quarterly dividend by 5.5%, to $0.385 a share from $0.365. The new annual rate of $1.54 yields 5.9%....