Partnerships With Government Of Canada And Flexjet Will Expand Training Opportunities

Key Takeaways

• Strategic partnerships and an expanding business aviation segment position CAE for growth in defense and fractional jet markets, boosting future revenues and margins.
  
• Global pilot demand and military modernization efforts present significant revenue opportunities, supported by CAE's substantial order backlog and innovative training solutions.
  
• CAE's short-term revenue and margins face pressure from supply chain issues, expansion costs, legacy contracts, and dependency on recovering aircraft production.

Catalysts

Provides simulation training and critical operations support solutions in Canada, the United States, the United Kingdom, Europe, Asia, the Oceania, Africa, and Rest of the Americas.

• CAE's strategic partnership with the Government of Canada to develop the Future Fighter Lead-in Training program is poised to enhance defense training capabilities, potentially driving future revenue and margin growth in CAE's defense segment.
  
• Continued expansion in the business aviation training segment, notably following the SIMCOM transaction and the extended agreement with Flexjet, positions CAE to capitalize on the burgeoning market for fractional jet ownership, potentially boosting future revenues and margins.
  
• The robust outlook for global pilot demand, supported by the projected delivery of nearly 15,000 aircraft from Boeing and Airbus over the next decade, presents significant long-term revenue opportunities for CAE’s civil aviation training segment.
  
• Improved long-term prospects in the defense sector, driven by global military modernization efforts and increased budgets among NATO and allies, signify potential revenue growth and margin enhancement as CAE positions itself as a key provider of innovative training solutions.
  
• CAE's record backlog of $20 billion, fueled by significant order intake across civil and defense segments, underscores sustained future revenue growth prospects and supports achieving strong free cash flow, which could drive earnings improvement.

CAE Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CAE's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from -5.2% today to 16.2% in 3 years time.
• Analysts expect earnings to reach CA$901.4 million (and earnings per share of CA$2.84) by about March 2028, up from CA$-235.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.4x on those 2028 earnings, up from -47.2x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 30.0x.
• Analysts expect the number of shares outstanding to grow by 0.44% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.54%, as per the Simply Wall St company report.

CAE Future Earnings Per Share Growth

Risks

• Delayed commercial aircraft deliveries and ongoing supply chain challenges have resulted in deferred training bookings from some airline customers, particularly in the Americas, which could impact CAE's short-term revenue growth.
  
• Higher costs associated with financing expansions and increased lease liabilities, in part due to acquisitions like SIMCOM, have contributed to rising net finance expenses, which may pressure net margins if not offset by strong revenue growth.
  
• The continued presence of legacy defense contracts, albeit decreasing, has contributed to margin dilution in the Defense segment, which could affect overall earnings if new higher-margin contracts do not ramp up as expected.
  
• Expansion of training centers, such as those in Las Vegas and Savannah, involves high initial costs and takes time to reach full utilization, potentially impacting short-term profitability and delaying expected margin improvements.
  
• Dependence on a robust and timely recovery in aircraft production, particularly from Boeing and Airbus, remains critical; further disruptions could result in continued softness in pilot training demand and aviation sector revenues, impacting future revenue expectations.

Valuation

• The analysts have a consensus price target of CA$40.0 for CAE based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$45.0, and the most bearish reporting a price target of just CA$25.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$5.6 billion, earnings will come to CA$901.4 million, and it would be trading on a PE ratio of 17.4x, assuming you use a discount rate of 6.5%.
• Given the current share price of CA$34.75, the analyst price target of CA$40.0 is 13.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.