cae

CAE INC. $13 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 254.0 million; Market cap: $3.3 billion; SI Rating: Average) has paid an undisclosed sum for Sabena Flight Academy, which operates pilot training facilities in Belgium and Arizona. The acquisition expands CAE’s annual training capacity, from 1,000 pilots to 1,400. Demand for pilot training services should continue to rise, as many airlines face pilot shortages due to increasing interest in air travel in Asia and the Middle East. CAE also continues to win new orders for its flight simulators. It recently sold five simulators for $56 million. That’s about 4% of CAE’s annual revenue of $1.4 billion. CAE sold 37 flight simulators in the fiscal year ended March 31, 2008, and has sold 10 so far in fiscal 2009. Sales should continue to grow as airlines upgrade their aging fleets. CAE is a buy.

BCE INC. $37.30, Toronto symbol BCE, earned $0.57 a share in the three months ended march 31, 2008, up 9.6% from $0.52 a year earlier. These figures exclude restructuring costs and gains on the sale of investments. Most of the increase was due to savings from the restructuring, as well as lower taxes and interest expenses. Revenue crept up to $4.39 billion from $4.38 billion, as growing demand for BCE’s wireless and Internet services offset lower revenue from its traditional telephone operations. The stock is now trading 13% below the $42.75 a share that a group led by the Ontario Teachers’ Pension Plan has offered for the company. That’s because investors fear that problems in the debt markets will force the consortium to delay, reprice or scrap the deal. However, we feel the takeover will go through by the end of the year. BCE is still a buy....

CAE INC. $12 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 253.9 million; Market cap: $3.0 billion; SI Rating: Average) is a leading supplier of flight simulators to commercial airlines and the military forces of more than 35 countries. Through 24 training facilities equipped with over 115 flight simulators, CAE trains more than 50,000 pilots a year.

Diverse clientele tempers CAE’s risk

CAE’s exposure to the cyclical airline business adds risk. However, the company now gets about half of its revenue from commercial clients, and half from military customers. As well, training services give CAE steady, recurring revenues. That cuts its reliance on new products for growth. Services and products each account for roughly half of CAE’s total revenue. Revenue fell from $1.1 billion in fiscal 2003 (fiscal years end March 31) to $986.2 million in 2005 after CAE sold its non-aviation operations as part of major restructuring. Revenue grew to $1.25 billion in 2007, and should reach $1.4 billion in 2008. Earnings before restructuring costs fell from $0.60 a share (total $131.0 million) in fiscal 2003 to $0.19 a share ($46.9 million) in 2005. Earnings jumped to $0.52 a share ($129.1 million) in 2007....

BCE INC. $37.24, Toronto symbol BCE, gained 7% this week after a Quebec court dismissed a class-action lawsuit launched by the company’s bondholders. The ruling improves the chances that the $42.75-a-share takeover by a group led by the Ontario Teachers’ Pension Plan will succeed. The stock is now trading at roughly 13% below the offer, partly because the deal still requires regulatory approval. In addition, the problems in the credit markets could also make it harder for the consortium to issue the bonds it needs to finance the takeover. If the deal falls through, BCE’s stock could fall to its pre-takeover level of around $30. However, the company’s operations still generate plenty of cash flow, and it could unlock value by spinning off some of its operations....

TERANET INCOME FUND $10 (Toronto symbol TF.UN; Aggressive Growth Portfolio: Manufacturing & Industry sector; Units outstanding: 155.0 million; Market cap: $1.6 billion; SI Rating: Speculative) has won a contract from the City of Toronto to collect a new tax on land transfers. Teranet will also process rebates for eligible home buyers. Teranet did not reveal the value of this deal, but it’s a good fit with its electronic land registry and information services. It could also lead to similar deals with other municipalities. Teranet is a buy....

HOME CAPITAL GROUP INC. $39.51, Toronto symbol HCG, earned $2.59 a share in 2007, up 32.8% from $1.95 in 2006. Revenue grew 30.6%, to $368.9 million from $282.5 million. The company’s loan portfolio rose 21.5%, mainly due to strong demand for residential and commercial mortgages. Home Capital has no exposure to the U.S. mortgage market. Receivables on its Equityline Visa credit cards rose 40.2% in 2007. The strong results let Home Capital increase its dividend for the eighth time in the past five years. The new annual rate of $0.48 a share, up 9.1% from $0.44, yields 1.2%. Home Capital Group is a buy....

BCE INC. $36.29, Toronto symbol BCE, is trading nearly 15% below the $42.75-a-share takeover offer it accepted in July 2007. This is partly because several institutional holders of BCE bonds have launched a class-action lawsuit to oppose it. BCE’s plan to take on more debt has hurt the value of their holdings. If the suit succeeds and forces BCE to compensate the bondholders for their losses, the Ontario Teachers’ Pension and its partners may decide to abandon the takeover. Liquidity problems in the debt markets could also scuttle the takeover, since that could hurt the ability of the takeover consortium to issue new bonds. This group has also lined up loans from several banks, but recent writedowns of U.S. subprime mortgages have raised fears that these banks may withdraw or cut their involvement. However, lower interest rates will cut the buyers’ costs. The drop in BCE suggests that the takeover is unlikely to go through. But at the current reduced price, BCE is once again an attractive buy for income and growth....

CAE INC. $13 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 252.3 million; Market cap: $3.3 billion; SI Rating: Average) makes commercial and military flight simulators. It also operates pilot training facilities in 19 countries. In its first fiscal quarter ended June 30, 2007, earnings excluding unusual items rose 25% to $0.15 a share from $0.12 a year earlier. Revenue grew 6.2%, to $358.3 million from $337.3 million. CAE spends about 9% of its revenue on research, so it’s more profitable than it appears. The $0.04 dividend yields 0.3%. The stock fell to below $3 after 9/11, but rose to $15.25 in July 2007. It now trades at 20.3 times the $0.64 a share it should earn in fiscal 2008. As well, rising fuel costs could slow demand for CAE’s products and services....

Air travel has rebounded strongly since 9/11. But high oil prices could hurt the ability of airlines to invest in new planes and simulators. Although riskier, we feel Bombardier’s wider sources of income gives it greater earnings potential right now than CAE. BOMBARDIER INC. (Toronto symbols BBD.A $6.29 and BBD.B $6.26; Aggressive Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 1.7 billion; Market cap: $10.6 billion; SI Rating: Extra risk) is the world’s third-largest maker of commercial aircraft, after Boeing and Airbus. It specializes in small business jets, and regional jets that carry around 100 passengers. The company also makes passenger railcars. In its second fiscal quarter ended July 31, 2007, Bombardier earned $0.05 a share, up 66.7% from $0.03 a year earlier (all amounts except share price and market cap in U.S. funds). The most recent quarterly figure excludes a one-time writedown of its investment in a group that’s refurbishing the London, UK subway system. Strong demand for business jets and railcars, particularly in China and Russia, expanded sales by 14.3%, to $4.0 billion from $3.5 billion....

CGI GROUP INC. $10.80 (Toronto symbol GIB.A; SI Rating: Speculative) (514-841-3200; www.cgi.ca; Shares outstanding: 328.9 million; Market cap: $3.6 billion) is among the largest independent information technology and business process services firms in North America. CGI and its affiliated companies employ approximately 25,500 professionals. CGI has offices in Canada, the U.S., Europe and the Asia Pacific region. CGI had revenues in the three months ended June 30, 2007 of $933.3 million, up 7.7% from $866.5 million a year earlier. Earnings rose 79.3%, to $64.4 million or $0.20 a share from $35.9 million or $0.11 a share. The earnings increase came from the higher revenue plus cost-efficiency measures. CGI continues to sign new contracts for its computer and business process services. For example, the company recently announced a 10-year $200 million contract agreement with CAE, a 34-month contract for $16.1 million U.S. with the Washington State Children’s Administration and a 5-year contract valued at approximately $9 million with the Calgary Health Region....