Record Order Backlog And Investments Will Strengthen Future Prospects

Key Takeaways

• Strong order backlog and strategic investments signal robust future revenue growth and improved earnings, benefiting from high demand for training services.
  
• Restructuring and backlog growth in Defense segment expected to enhance free cash flow and net margins, supporting long-term profitability.
  
• Leadership uncertainty, aviation supply challenges, legacy contract risks, low pilot hiring, and high debt levels could impact CAE’s revenue, growth, and margins negatively.

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 secured nearly $3 billion in total orders this quarter, increasing their adjusted backlog to a record $18 billion, up significantly over the previous year, signaling expected future revenue growth.
  
• Despite OEM supply chain disruptions, CAE is positioned to benefit from a high demand for pilots and training services, which supports a long-term growth trajectory and is likely to positively impact revenue.
  
• Strategic investment in acquiring a majority stake in SIMCOM is expected to increase recurring revenue and boost earnings and free cash flow, contributing to improved net margins.
  
• Completion of restructuring and integration programs is anticipated to enhance CAE's free cash flow profile and achieve annual cost savings of approximately $20 million, thereby improving net margins.
  
• The Defense segment showed significant backlog growth, with expectations for annual revenue growth and an increase in adjusted segment operating income margin, supporting overall 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 -7.8% today to 15.8% in 3 years time.
• Analysts expect earnings to reach CA$852.1 million (and earnings per share of CA$1.61) by about December 2027, up from CA$-345.5 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 23.5x on those 2027 earnings, up from -30.7x today. This future PE is lower than the current PE for the US Aerospace & Defense industry at 35.2x.
• Analysts expect the number of shares outstanding to grow by 18.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.2%, as per the Simply Wall St company report.

CAE Future Earnings Per Share Growth

Risks

• The CEO transition at CAE, with Marc Parent stepping down, introduces a period of potential leadership uncertainty which could impact strategic direction and operational stability, affecting revenue and earnings in the transition period.
  
• Ongoing challenges in commercial aviation from OEM aircraft supply disruptions, including issues with Boeing deliveries and grounded Airbus aircraft due to engine problems, could continue to limit civil aviation training demand, potentially impacting revenue growth projections.
  
• Despite a strong backlog, risks associated with legacy contracts in the Defense sector could introduce execution challenges, possibly affecting profit margins and net income adversely if they lead to cost overruns or schedule delays.
  
• Fluctuations in pilot hiring rates in the U.S., now at persistently low levels, could restrain Civil segment growth and training demand, negatively affecting revenue and operating margins unless recovery occurs.
  
• Elevated net debt levels and associated finance expenses could constrain CAE's ability to invest in growth opportunities or result in higher interest costs, thereby impacting net margins and free cash flow in a rising interest rate environment.

Valuation

• The analysts have a consensus price target of CA$31.65 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$37.0, and the most bearish reporting a price target of just CA$23.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$5.4 billion, earnings will come to CA$852.1 million, and it would be trading on a PE ratio of 23.5x, assuming you use a discount rate of 6.2%.
• Given the current share price of CA$33.34, the analyst's price target of CA$31.65 is 5.3% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.