CAE is Cleared for Takeoff

While the world threw cash at “revenge travel” post-pandemic, we steered clear of airline stocks. They’re capital-intensive, cyclical, and full of turbulence—not our cup of tea. (See our August 2, 2024, blog Air Canada Has Too Much Baggage)

That said, travel remains a dominant theme, but we’re playing it differently.

CAE is a Canadian company that sells flight simulators and provides civil and defense training. With a global pilot shortage looming—a full 264,000 airline pilots and 60,000 business jet pilots will be needed over the next decade—someone has to train them.

We bought shares for suitable clients at C$27.61 per share. Today, it’s trading just over C$35—a decent 27% gain. Old, fixed-price defense contracts were a drag, but CAE has been systematically clearing them out. Only five problem contracts remain. As they disappear, defense margins will climb, boosting profitability.

Investors have taken notice that the company’s turned a corner. When earnings came out on February 14, the stock soared 14%. This followed a 12% jump after November’s earnings. 

Meanwhile, activist investor Browning West now owns 4.3% of CAE. The company recently added four new directors, including Browning West co-founder Peter Lee.

Covid hit CAE hard—it even suspended its dividend in 2020. We’d love to see it reinstated. Historically, CAE pays out 30% of earnings, which could support a $0.40 per share dividend. Not massive, but dividends attract a different class of investor. (See our March 22, 2024, blog Is Alphabet’s Next Share Price Catalyst a Dividend?) For now, the company is prioritizing debt reduction.

CAE has set a three-year earnings growth target in the low- to mid-teens. With those bad defense contracts clearing, that goal looks highly achievable.

And tariffs? A non-issue. Two-thirds of CAE’s revenue comes from services (training), which are easy to shield. CEO Marc Parent even shrugged off concerns during last quarter’s conference call, noting that most simulator parts are sourced from the European Union or the U.S.

A global pilot shortage fuels demand, contract cleanup boosts margins, and an activist investor is shaking things up. We see strong tailwinds ahead and continue to buy CAE for new clients.

-written by Jeff Pollock