In a few years, you may look back and wonder why you didn’t take advantage of CAE (TSX:CAE) while it was still flying under the radar. Known for its innovative simulation and training services across aviation, defense, and healthcare, CAE has quietly positioned itself as a long-term winner. While the stock has experienced some fluctuations, its current valuation doesn’t seem to fully reflect the strength of the business or the opportunities that lie ahead.
The Numbers
Recent earnings from CAE paint an interesting picture. The company reported revenue of $1.07 billion for the first quarter of fiscal 2025, a 1.7% increase from the previous year. The Civil Aviation segment led the way with $587.6 million in revenue, up 9% year-over-year, while the Defense segment brought in $484.9 million, a 3% increase. These gains came despite a challenging economic backdrop, demonstrating the resilience of CAE’s business model. However, the market didn’t seem overly impressed, likely due to a drop in operating income, which fell to $18.8 million from $22.7 million the year before. This decline wasn’t due to operational weaknesses, but rather from the costs related to the integration of Sabre’s AirCentre, a major acquisition aimed at expanding CAE’s airline operations portfolio.
While the AirCentre acquisition was costly upfront, it has the potential to be a game-changer, enhancing CAE’s offerings for airline clients by optimizing operations through improved scheduling, crew management, and flight planning solutions. CAE expects these integration costs to ease by the end of the first half of fiscal 2025, which should result in healthier margins as the benefits start to come through.
In addition to the acquisition, CAE’s record-breaking $18 billion order backlog as of September 2024 speaks volumes. This is a 50% increase from the previous year, highlighting the strong demand for CAE’s training solutions. With the global commercial aircraft fleet expected to double in the next two decades and a wave of retirements hitting the pilot workforce, the need for high-quality training will only continue to rise.
Considerations
From a financial standpoint, CAE does carry some leverage. As of the first quarter, the company’s net debt stood at $3.1 billion, leading to a net debt-to-adjusted EBITDA ratio of 3.4 times. While some investors may view this as a concern, it’s important to note that CAE generates strong cash flow—$789 million in the latest quarter—which should make it easier to reduce that debt over time.
Market sentiment around CAE stock has been mixed, which is partly why the stock still trades at what could be considered a discount. Shares have risen 37% since November 2024, reflecting a recovery from previous lows. However, they’re still down around 6% year-to-date as of February 2025. This volatility might deter some investors, but for those with a long-term perspective, it could be an opportunity. When a company with a dominant market position, rising revenues, and a record order backlog trades below its historical valuation multiples, it often indicates that the market hasn’t fully recognized its potential.
Looking Ahead
Looking ahead, CAE’s prospects remain solid. The company is making significant investments in digital training solutions and immersive technologies to stay ahead of industry trends. Its focus on sustainable aviation practices, including training for electric aircraft, further enhances its long-term appeal. The company’s defense contracts also remain strong, as governments continue to prioritize military readiness amidst growing geopolitical tensions.
Bottom Line
Ultimately, the current dip in CAE’s stock price seems more like an opportunity than a red flag. The company’s strong business fundamentals, substantial order backlog, and leadership in simulation and training give it a competitive edge that’s tough to beat. While the stock might not see immediate gains, its long-term trajectory looks promising. A few years from now, you may just wish you had invested when it was still flying under the radar.
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