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Shares in local aviation training employer worth putting on watch list

Ron Walter looks at CAE and its outlook
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BizWorld_withRonWalter
Bizworld by Ron Walter

One of Moose Jaw’s larger local employers is CAE Inc, the private partner for national defence RCAF pilot training at 15 Wing Moose Jaw.

Four years ago, CAE came to Moose Jaw, taking over the Bombardier flying training contract.

Since then, investors have been rewarded with a 143 per cent gain in the stock price plus a dividend rate higher than any interest rate.

The company happens to be in the right place at the right time; having built strong worldwide operations in aviation training — both civil and defence.

With more than 50 training locations, 10,000 employees and four regional divisions — USA, Canada, Europe/Africa, and Middle East/Asia Pacific — CAE covers the globe.

The civil aviation operations cover everything from pilots and maintenance to accounting to cabin crews.

CAE believes it has only 33 per cent of the $3.5 billion civil aviation market and seven per cent of the $15 billion military aviation market, leaving lots of room to expand and grow.

Given its size and scope any one developing head-to-head competition would find extreme difficulty, making CAE a choice for investors desiring an industry with low risk of price-cutting competition.

The outlook for the aviation training industry is robust with an industry forecast of annual 4.3 per cent growth in airline passenger traffic for years to come.

The company’s own 10-year outlook to 2028 suggests bright times ahead. In that time frame the world will need 50,000 new business aircraft pilots, 270,000 new airline pilots and 215,000 pilot upgrades.

Company backlog has grown to almost $9.4 billion from just over $8 billion a year ago.

Debt is a reasonable 35 per cent of assets.

CAE market value of $9.2 billion is 123 per cent of annual sales, suggesting the current $33.52 stock price isn’t too sky high.

Other benchmarks suggest the price is lofty.

The price to book value of four times seems lofty and the price-earnings ratio of 28 times is much higher than the annual growth rate.

The shares sell at a fairly high 14 times cash flow. 

Most of the price gain since 2015 took place in the last year. Investors with these gains are riding on momentum. An unexpected event damaging profits could cause the price to suddenly plummet as investors lock in their gains by selling.

CAE is not without risk. If trade wars become extreme, the fastest-growing Asia/Pacific market could turn into a challenge.

As long as airline growth continues and the military needs pilots, CAE has a strong business model.

Investors may want to wait for a price downturn before flying with CAE shares. According to most analysts a recession that will dampen stock prices should happen within the next 18-24 months.

CAUTION: Remember when investing, consult your adviser and do your homework before buying any security. Bizworld does not recommend investments.

Ron Walter can be reached at ronjoy@sasktel.net

The views and opinions expressed in this article are those of the author, and do not necessarily reflect the position of this publication.   




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