CAE Inc.

 

CAE is the leading maker of flight simulators (FFS) and operates the largest and broadest pilot training network with more than 65 training centres and flight academies around the world providing services to civil and defense customers.  They have also been leveraging their simulation expertise to provide training solutions in the healthcare market. CAE isn't screaming cheap nor is it materially valued at a premium; they have been putting up solid growth which looks to continue thus I feel it’s attractively valued.  Notably my assessment of earnings differs from both the company’s presentation and analyst estimates.  I account for stock-based compensation which can swing due to changes in the price of the stock rather than significant changes in grants, Investment Tax Credits, gains and losses on sales of assets, and other charges, all of which can significantly affect comparability and send the wrong signals of profitability.  CAE’s growth opportunity lies in expanding its share in the >$3.5bn Civil training market and militaries around the world employing higher rates of simulator training.  Anytime you hear about a looming global pilot shortage or the need to train thousands of new pilots, CAE is well-positioned to participate in the initial and ongoing training of many pilots.  Back in 2001, CAE did not operate training services so it was much more tied to CapEx cycles.

 

Ests:     3Q20   4Q20   FY20    FY21

Revs    940m   1.1b     3.8b     4.1b

EPS      .35       .48       1.35     1.58

y/y       +9%     +24%   +7%     +14%

 

P=40.13 div=$0.44, yield=1.1%, D/C=49%, adj TTM EPS=1.38, P/E=29X, FY20 P/E=25X

Mid-quarter Update April 6, 2020

  • Not surprising, CAE temporarily suspended the dividend to focus on protecting its financial position, it’s the right move in this environment.  Company is temporarily furloughing 2600 employees (of 10,500 total).  Company has also designed a simple ventilator, awaiting Health Canada approval.

  • Also reduced CapEx, executive team salary cuts, VPs, directors and managers as well

  • Importantly, CAE continues to offer training services to civil and defence customers.  By no means does this mean I think the business will not be affected, of course it will be impacted by the current environment, I just think the stock has been punished significantly more than the long-term value of the business, presenting a compelling opportunity. 

3Q20   .41 vs .29 est .35 down from .36

  • Feb 7, 2020, P=40.13, adj TTM EPS=1.38, P/E=29X, FY20 P/E=25X

  • Revs +13% to 816.3m, OM 17.9% vs 12.9%

  • Orders +25% to 1.1bn, B/B=1.2, Backlog +5% to 9.4bn

  • Civil +22% to 558.1m, OM 22% vs 19%, orders +20% to 706m, B/B=1.27, 17 FFS orders vs 16, 12 deliveries vs 16, Backlog 5.3bn

  • Defence +1% to 332.4m, OM 9.4% vs 7.6%, orders +37% to 367.4m, B/B=1.11, OM 10% , Backlog 4.2bn

  • Healthcare +19% to 33m, OpInc 0.6m vs 0.6m

  • Civil includes acquired BBAT if 4Q19, timing of FFS prodn/sales, contribution of recently deployed training sims in network (and possibly higher demand from 737 Max training) 

  • FCF 275.3m vs 155.1

2Q20   .27 vs .21 +29%, est .25 down from .28

  • Nov 13, 2019, P=34.29, TTM EPS=1.24, P/E=28X

  • Revs +21% to 896.8m, GM 26.4% vs 27.1%, OM 13.4% vs 12.5%

  • Orders +1% to 995.4m, B/B=1.11, 

  • Civil +35% to 529.9m orders +5% to 602.9m, adj OM 19.1% vs 16.1%, B/B=1.14, 

  • FFS deliveries 18 vs 5, Orders 11 vs ?

  • Defence +5.1% to 336.5m, OM 7.7% vs 10.6%, B/B=1.08

  • Healthcare flat at 30.4m, OpInc -1.4m vs 1.3m

1Q20   .21 vs .23 -9%, est .28 down from .30

  • Aug 14, 2019, P=35.81, TTM EPS 1.19, P/E=30X

  • Increased dividend 10% to .44, reported adj EPS .24 vs .26, incl gains and higher ITC benefits

  • Revs +14.3% to 825.6m (est 943), Core OM 12.3% vs 12.6%, OpInc +12.6%, EBT -11% due to higher interest expense, Orders +36.5% to 940.8m, B/B=1.14

  • Civil +11% to 477.6m, OM 21.1% vs 18.2%, orders +39% to 693m, B/B=1.45, FFS deliveries 5 vs 12, orders 9 vs 18

  • Defence +19.4% to 320.5m, OM 4.7% vs 8%, orders +31% to 219.5, B/B=0.68

  • Healthcare +20.6% to 27.5m, OpInc -2.8 vs -1.3, 

  • Backlog 9.4bn

  • Solid results but stock is expensive given EPS being down due to higher interest expense. 

4Q19   .48 vs .31 +55%, est .43, FY19 EPS 1.26 vs 1.16, +9%

  • May 17, 2019, P=32.00, TTM EPS 1.26, P/E=25X, FY20 P/E=22X

  • Revs +42% to 1bn, GM 28.2% vs 32.9%, orders +39% to 1.4bn, B/B=1.38, FY B/B=1.2

  • Civil +50% to 593.4m, OM 20.6% vs 18.8%, Orders +104% to 1.1bn, B/B=1.9, 25 deliveries vs 8, FFS orders 20 vs 5, FY19 78 vs 50

  • Defence +33.5% to 387.9m, OM 13.1% vs 12.5%, orders -39% to 265m, B/B=0.68, FY B/B=0.83

  • FCF 116.8m vs 117.3m, Backlog +18% to 9.49bn

  • Healthcare +16% to 40.7m, OpInc 4.2m vs 6.7m

  • Solid results, benefited by acquisitions and catch-up from weak 3Q due to strike

  • FY20 Outlook: Civil OpInc to grow upper 20% range due to continued strong demand and acquisition of Bombardier Business Aircraft Training. Defence OpInc growth mid to high single digit growth.  Healthcare OpInc growth double digit.  Maybe 20% EPS growth next year but some of that opinc growth will be juiced by IFRS 16 lease expense breaking down into an operating component and a financing component so net income growth will be lower, plus additional interest expense from new debt.  

 

3Q19   .29 vs .37, ex gains, est .32 down from .36, 15% TR, 

  • Feb 8, 2019, P=28.08, TTM EPS=1.08, P/E=26X, FY20 P/E=19X

  • Revs -1.4% to 816.3m, GM 28.6% vs 30.9%, OM 13.8% vs 17.8%, OpInc -23%, orders -28% to 882m, B/B=1.08,

  • Civil Revs -15% to 458.4m, OM 19% vs 21.4%, OpInc -24% to 87.2m, 16 FFS orders, 16 deliveries vs 18, sold another 14 so YTD 64, expect ~70 in FY19, B/B=1.28

  • Defence +27% to 330.2m, OM 7.6% vs 11.7%, OpInc -17% to 25.2m, B/B=0.81

  • Healthcare -0.8% to 27.7m, OpInc 0.6m vs 1.5m

  • Civil training revs up double digit, Civil impacted by 5-week work disruption and fewer simulator deliveries which are expected to be recouped in 4Q, on track to deliver record 56 FFS in FY19 with >40% of those in 4Q (23?)

  • Defence opinc impacted by higher level of services activity on contracts in early stages of ramp

  • Backlog +19% to 8.96bn, FCF 155.1m vs 146m due to higher cash from WC

  • Results weak but due to temporary disruptions, 4Q and outlook still solid, stock not exactly cheap but long-term trends still at play, tempting to be a source of cash but I also view CAE as a core holding.

2Q19   .23 vs .19, +21%, est .23

  • Nov 13, 2018, P=24.20, TTM EPS=1.16, P/E=21X, FY20 P/E=18X

  • Revs +20% to 743.8m, GM 27.1% vs 29.4%, OM 13.9% vs 13.9%, orders +6% to 986m, B/B=1.33

  • Civil +24% to 393.1m, OM 16.1% vs 16.7%, OpInc +19%, B/B=1.46, 16 FFS Orders, 5 delivered vs 11, 575m, B/B=1.46X

  • Defence +18% to 320.3m, orders 380.2m, B/B=1.19X, adj OM 11.3% vs 12.2%

  • Healthcare +7.4% to 30.4m, mainly due to acquisition of AOCE, OpInc 1.3m vs 2.2m

  • Announced agreement to acquire Bombardier’s Business Aircraft Training business for U.S. $645m, on annualized basis should contribute high single-digit % EPS accretion, also announced outsourcing deal with easyJet worth more than $170m

  • Backlog +24% to 8.7bn, FCF 137.7m vs 63.5m

  • Solid results reflecting valuation and growth opportunities.

1Q19   .27 vs .25, +8%, reported .26 vs .22 (+18%), est .26 down from .28

  • August 14, 2018, P=26.82, TTM EPS 1.15, P/E=23X, FY19 P/E=22X, Raised dividend to .10

  • Last Year’s results restated due to IFRS 15, impacts quarters but minimal impact over FY18

  • I'm now including intangible amortization as they continue to add, lower amort boosting y/y growth

  • Revs +10% to 722m, GM 30.3% vs 31%, B/B=0.95, OM 17.6% vs 19.8%, core OpInc -2%

  • Civil Revs +14.5% to 430.9m, OM 18.2% vs 18.5%, B/B=1.16, 18 FFS orders, 12 delivered vs 8, Backlog +21% to 4.15bn

  • Defence +2.9% to 268.3m, OM 8% vs 9.2%, B/B=0.6, Backlog -6.4% to 3.9bn

  • Healthcare -4.6% to 22.8m, OpInc (1.3) vs (1.6)

  • Total Backlog +6% to 8.05bn

  • Company recently announced a new R&D program, mainly a focus of resources rather than increased spending

  • Mgmt upbeat on training opportunities. On Defence side, optimistic about their new proxy structure to address top secret training. For FY19, mgmt expects low double digit opinc growth in civil and mid-high single digit growth for Defence.

  • Stock was weak following results that appeared to somewhat meet estimates, difficult due to new IFRS standard. That said, reported opinc is boosted by lower D&A (mostly on Defence) and higher gains (implying acceleration later in the year).

  • I still like the company, while valuation on my earnings metrics doesn't look stretched, company continues to add to intangibles organically and repurchasing shares from exercised options (although expense level is highly correlated to share price appreciation).

4Q18   .47 vs .39, est .32, w 21% TR, reported adj .37 vs .31, adj FY EPS +9% to 1.39

  • Core EPS +20%, reported +19%, expected eps was for 3% growth

  • Revs +6.3% to 780.7m, GM 33.4% vs 32%, core OM 23.9% vs 20%, B/B=1.3, FY B/B=1.36,

  • Civil Revs +9% to 455.2m, OM 21% vs 20.1%, B/B=1.2, FY B/B=1.44, 5 FFS, 50 for FY18 (already sold 10 so far in 1Q19) Backlog +21% to 3.98bn

  • Defence Revs +2.7% to 290.4m, OM 13.3% vs 11.7%, B/B=1.5, FY B/B=1.29, Obligated Backlog +8.7% to 2.9bn, Unfunded backlog -8.7% to 3.9bn due to removal of an award

  • Healthcare +2.6% to 35.1m, OM 19.1% vs 12% due to remeasurement of royalty obligations and product mix

  • Record annual orders and record backlog,

  • Going forward, IFRS change to revenue recognition for certain training devices recognized on % of completion will shift to upon completion, immaterial impact on FY18 financials but could introduce more volatility on a quarterly basis.

  • Solid results especially orders, Return on invested capital 12.3% vs 11.2%

  • Mgmt expects low double-digit opinc growth in Civil in FY19, mid-high single digit growth in Defence, and to resume double-digit growth in Healthcare.

3Q18   .28 vs .29 w 25% TR, est 0.27, reported adj 0.28 vs 0.26, 17% TR

  • Revs +3.2% to 704.4m, orders +23.6% to 1.2bn, B/B=1.74, OM 17.1% vs 18.1%

  • Core OpInc -2.5% vs reported OpInc +10% due to lower intangible amort and higher ITCs and gains

  • Civil +0.2% to 413.7m, ex gain OM 18.0% vs 17.3%, B/B=2.43, 26 FFS, 45 YTD

  • Defence +8% to 262.8m, OM 12.4% vs 12.3%, Orders 187.9m, B/B=0.71

  • Healthcare +6.5% to 27.9m, OpInc 1.5m vs 0

  • U.S. tax reform to lower tax rate to 20-22%

2Q18   .26 vs .27, est .24, reported adj .22 vs .18

  • Revs +1.7% to 646m, Orders +24.7% to 931.4m, B/B=1.44, OM 17.5% vs 17.9%

  • Civil -2% to 349m, OM ex gain 18% vs 15.3%, Orders 387.6m, B/B=1.11, , 11 FFS, 19 in 1H, Backlog 3.1bn

  • Defence +6% to 268.7m, OM 11.2% vs 11.5%, Orders 515.5m, B/B=1.92, Backlog 3.6bn

  • Healthcare +2.5% to 28.3m, Op Inc 2.2m vs 2.6m

  • Free cash flow 63.5m vs 27.3m last year, Backlog 6.7bn

  • Outlook: expects good continued growth in FY18, low double digit growth in OpInc in Civil, mid-high single digit growth in Civil, lower CapEx

  • While top and bottom line are softer, overall trends persist and very strong order bookings for the quarter should overshadow any softness for this quarter. Stock recovered from its sell-off after 1Q18 results, valuation crept up a bit but still reasonable, stock reacting negatively post quarter. This is where I like to emphasize my adjustments, reported adjusted EPS shows growth but last year had higher stock comp and losses on sales of items so I show a slight earnings contraction rather than a slight gain. That said, orders are strong and the softness in this quarter isn’t something I’m concerned about, additional weakness might present a buying opportunity.

1Q18   .32 vs .29, reported .24 vs .26, est .25

  • Revs +7.3% to 698.9m, B/B=0.98

  • Civil +10.8% to 411.8m, OM 17.8% vs 17.2%, orders 400.4, B/B=0.97, 9 FFS, Backlog flat at 3.2bn

  • Defence +2.2% to 263.2m, OM 10% vs 11%, orders B/B=1.0, Backlog +24% to 4.1bn

  • Healthcare +5.3% to 23.9m, OpInc -1.6m vs -0.1m, higher opex for product launch, sales mix

  • Defence OMs hurt by higher mark-market of stock-based comp, ramiping a number of new development programs and backlog

  • Last quarter’s strong cash flow somewhat reversed to weaker cash flow y/y

  • Reported results of .24 vs .26 are misleading due to no tax last year and a significant increase in stock comp expense which is due to revaluation of existing grants, also had a deferral of about .03/share due to revenue recognition on standardized commercial simulators.

4Q17  .37 vs .33, est .30

  • Revs +2% to 734.7m (est 748.4), GM 32% vs 29.1%, adj OM 20.3% vs 18.8%, B/B=1.03

  • Civil revs +12.4% to 417.8m, OM 20.1% vs 19.1%, orders -8% to 481.3, B/B=1.15, FY B/B=1.09, 4Q 17 FFS, FY=50, Backlog +6.8% to 3.29bn

  • Defence -3.7% to 282.7m, OM 11.7% vs 13.0% (4Q16 had a 1 time benefit excluding which would have OpInc +4.5%), Backlog +28.7% to 4.2bn due to solid orders and acquisition, orders -28% to 238.8m, B/B=0.84, FY B/B=1.33

  • Healthcare -4.5% to 34.2m, OM 12% vs 9.8%

  • Solid quarter for cash flows, CFO 197.5m vs 51m, FCF 160.4m vs 12.8m

  • CAE reported EPS of .25 vs .23 or adjusted EPS of .31 vs .27 ex restructuring, integration, acquisition and 1-time tax items however this misses the significantly higher stock comp expense (revaluation not grants) and some other charges partly offset by higher Investment Tax Credits so earnings are better than they appear resulting in a lower P/E than appears.

  • Mgmt expects low double digit growth in Civil OpInc in FY18, mid-high single digit growth in Defence

3Q17  .29 vs .25 w 25% TR, not 16%

  • Revs +10.8% to 682.7m, orders +80% to 989.4m, B/B=1.45 (Civil 0.88, Defence 2.46)

  • Adj OM 18% vs 17.5%

  • Civil Revs +23% to 412.8m (increased prodn and LM acquisition), orders 362.7m incl 12 FFS, post Q sold 6 for YTD 39, OM 17.3% vs 16.5%,

  • Defence Revs -3.7% to 243.7, orders 600.5m, OM 12.3% vs 11.7%

  • Health -7.4% to 26.2m, OM 0% vs 5.7%

  • Backlog 7.39bn

  • Expect to be driving more revenue and profit per civil sim driven by more wet training and increasing market share.