Today’s recommendation is a company that makes flight simulators for airlines and militaries around the world. The company recently announced that it has set a new record for the sale of full-flight simulators (FFS) with 43 FFS already sold year to date in fiscal 2014.
CAE, Inc. (CAE.TO)
from The Successful Investor
CAE is the world’s leading maker of flight simulators. CAE made about half of the commercial aircraft simulators in use today and has 16% of the military simulator market.
Sales of simulators to airlines tend to move up and down with the economy. To steady its revenue, CAE began training pilots in 2001. It now trains over 100,000 pilots and crew members a year at 50 schools worldwide.
The company gets 55% of its revenue from commercial airlines and 40% from militaries, mainly in the U.S. and Europe. The remaining 5% comes from products it has developed for other industries, including simulators for specialized mining equipment and simulators and mannequins to train paramedics, nurses and medical students.
CAE gets 90% of its revenue from outside Canada, so it stands to profit from a weaker Canadian dollar.
In the three months ended September 30, 2013, CAE’s earnings fell 9.7%, to $38.3 million a year earlier. Per-share earnings fell 11.8%, to $0.15. Revenue fell 3.8%, to $487.5 million.
The drop is due to stronger competition in Europe and South America. As a result, CAE is relocating about 20 of its flight simulators to pilot schools where demand is greater. That has pushed up its costs, but should lift its earnings.
The company receives tax credits from the Canadian and Quebec governments. That’s why its net research costs were just 3.1% of its revenue, which is up from 2.8% a year earlier.
The company ended the quarter with an order backlog of $3.9 billion, which is roughly equal to two years’ worth of revenue.
To replace retirees and meet rising air travel demand, airlines will need about 500,000 new pilots over the next 20 years, particularly in fast-growing regions like Asia and the Middle East.
CAE will also benefit from new U.S. Federal Aviation Administration rules that mandate using simulators to train pilots to handle emergencies like severe weather and engine stalls.
The company’s earnings will probably dip to $0.67 a share in fiscal 2014. The stock trades at 20.9 times that figure. However, earnings should recover to $0.82 a share in 2015, and CAE trades at a more reasonable 17.1 times that forecast. CAE has increased its dividend each year since 2008. The stock currently yields 1.8%.
CAE is our #1 buy for 2014.
Patrick McKeough, The Successful Investor, 877-656-6461, www.tsinetwork.ca, January 17, 2014