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A Simulator at CAE Inc., in Montreal, Quebec, April 21, 2010. (Christinne Muschi/Christinne Muschi for The Globe and Mail)
A Simulator at CAE Inc., in Montreal, Quebec, April 21, 2010. (Christinne Muschi/Christinne Muschi for The Globe and Mail)

CAE confident military division will thrive Add to ...

As Canadian aerospace companies anxiously await details of the proposed cuts to the U.S. government’s military budget, one major player at least – CAE Inc. – is showing no signs of worry.

Montreal-based CAE, a global champion in the flight-simulation and training sector, is confident its military division will continue to thrive even as the United States and other countries – notably in austerity-minded Europe – cut back on military hardware in tough economic times.

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The company is coming off a strong fiscal year, with $950-million in orders, which included record orders from the U.S.

And CAE’s group president for military products, Martin Gagné, firmly believes his order book will continue to expand thanks to a strategy that includes geographic diversification in Asia and the Middle East and the development of new products and services. As well, the significant cost savings of military flight simulation training over live training will boost CAE’s fortunes in tough times, Mr. Gagné said in an interview Monday.

“These are very attractive solutions for [military customers]” he said.

The United States defence budget faces an automatic cut of about $600-billion (U.S.) over 10 years after American lawmakers couldn't agree on overall budget cuts – the subject of considerable partisan feuding on the best way to reduce the U.S. deficit.

Defence departments aren’t only cutting back; they are also looking for time- and money-saving systems, products and services that will boost efficiency and productivity, Mr. Gagné said – products he believes CAE can supply.

While several analysts share that optimistic outlook, other observers are not so sanguine.

Tim Page, head of the Canadian Association of Defence and Security Industries, points out that other Canadian companies besides CAE are exploring new markets to offset the decline in U.S. and European business. It’s also still not clear where the U.S. cuts will occur and that’s key in determining which Canadian companies will be hit, Mr. Page said.

“We still don’t know how big an issue this [U.S. cuts]will be. We’ll probably see the impact more in 2013 and 2014.”

Still, CAE’s recent performance is cause for optimism. “The growth in orders should alleviate government budget-cut concerns related to CAE’s military segment and suggests that CAE’s military sales should continue to increase in [fiscal 2013]versus F2012,” CIBC World Markets’ Michael Willemse said in a research note Monday.

CAE’s separate announcement Monday of $170-million in long-term training and services contracts in a joint venture with Brunei – which includes training for the Sikorsky S-70i Black Hawk helicopter – offers further growth opportunities, PI Financial analyst Chris Murray said in an update.

Cameron Doerksen of National Bank Financial said there are many new opportunities for CAE to grab in emerging markets and even in the U.S. “I believe they’re positioned to win new business and grow their military revenue,” he said in an interview.

Desjardins Securities analyst Benoit Poirier isn’t so sure.

“Although [Monday’s]announcement should be viewed positively by the market, we expect persistent uncertainties on the defence side to hamper future share-price appreciation,” he wrote in a research note.

“We would become more bullish on companies with defence exposure once there is greater clarity on how the U.S. government will reduce spending and which programs will be affected.”

Tim Page, head of the Canadian Association of Defence and Security Industries, says other Canadian companies besides CAE are exploring new markets to offset the decline in U.S. and Europe.

“We still don’t know how big an issue this [U.S. cuts]will be. We’ll probably see the impact more in 2013 and 2014.”

It’s still not clear where the U.S. cuts will occur and that’s key in determining which Canadian companies will be hit, Mr. Page said.

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