CAE Inc. (NYSE:CAE): Time for the Stock to Fly

We came across a bullish thesis on CAE Inc. (NYSE:CAE) on ValueInvestorsClub by zbeex. In this article, we will summarize the bulls’ thesis on CAE. The company’s shares were trading at $22.05 when this thesis was published, vs. the closing price of $23.59 on Jan 08.

CAE provides simulation training and critical operations support solutions across the globe. The two key segments of its operations are Civil Aviation and Defense & Security. The revenue split between the two segments are Civil Aviation- 57% and Defense & Security- 43%.

Recent headwinds from the strike at Boeing and the supply chain issues in the aircraft industry have been the reason why the growth in business was only 1.9% in 2024. The aircraft deliveries are expected to normalize in 2025, which will directly fuel demand for outsourced pilot training, a market in which CAE holds a share of almost 80%. The Defense & Security business has been a problem for the company, with operating margins of almost 0% due to unfavorable terms on a few contracts with the US Government. The margin is expected to increase to 6-7% due to a $11.2 billion contract signed for Canada’s Future Aircrew Training Program that will span 25 years.

The revenue mix of CAE’s civil aviation business is expected to drive value in the near future. This segment is expected to clock a CAGR of 10% in the next three years. An aging pilot profile should ensure sustained growth in this segment. 68% of the revenue in this segment is from Services, which is a recurring revenue stream, unlike the sale of full flight simulators that tend to remain volatile. Operating Margins have expanded from 15% to 23% in the last decade and are expected to increase further due to strong demand.

Valuing the company at 15x EBITDA would imply that the Defense business has a contribution of negative $450 million which is unfair given the latest business deals and margin expansion expected. Historically, the company has been trading at 25x its EPS and based on this there is a potential for the stock to rise by 40%.

While we acknowledge the potential of CAE as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than CAE but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.