This is a great time to be in the defence industry. Donald Trump wants to increase military spending to the tune of $54-billion (U.S.), plus he's putting pressure on all of America's allies to pull their weight and not rely so heavily on the American military.
While there was no increase in Canada's defence spending in Wednesday's 2017 federal budget, one of the companies that should benefit from higher defence budgets generally is Montreal-based CAE Ltd. It's not primarily a defence company – most of its revenue comes from its civil aviation and health-care clients. But military-related clients accounted for more than 35 per cent of its revenue in the latest quarterly report, and if defence spending gears up as expected, CAE should benefit.
"The United States will be looking to increase their force readiness," chief executive Marc Parent said in a recent interview with Bloomberg News. "It's going to happen fast, just like everything else is happening pretty fast. There's no doubt in my mind."
The company, which was founded in 1947, has become a world leader in flight simulators. It now has customers in 190 countries, and 90 per cent of its revenue is derived from international activities and exports. CAE has 160 sites and training locations in 35 countries, representing the world's largest installed base of flight simulators. Each year, the company trains more than 120,000 civil and defence-crew members.
CAE's business is vertically integrated. It doesn't just sell simulators; it also provides training and aviation services, in-service support and crew sourcing.
One of the things I look for in assessing the future outlook for companies such as this are new contract wins. Lately, CAE has had an impressive string of them.
On Feb. 13, the company announced that it had been awarded a $200-million (Canadian) contract by Airbus Defence and Space for comprehensive aircrew and maintenance training services to support the Royal Canadian Air Force's fixed-wing search and rescue program. The deal is for 11 years and includes options to extend an additional 15 years that would take the value to more than $300-million.
In mid-January, the company announced a series of aviation training contracts valued at over $250-million with companies such as Southwest Airlines, Korean Airlines, Jetstar Airways of Australia and China's Xiamen Airlines.
A couple of days before that, the company revealed deals for contracts worth more than $175-million to provide new simulation products, simulator upgrades and training support services for global military customers, including the U.S. and Australian navies.
The biggest deal of all this year was the Jan. 12 announcement of two long-term training services contracts with the United States Army and RCAF with a combined value of more than $1-billion, including options. The contract with the U.S. Army is for a rotary-wing flight-training classroom, simulator and live-flying-instructor support services for one year with eight one-year options until 2026.
The contract with the RCAF is a modification and extension to 2023 (with a one-year option to 2024) of the NATO Flying Training in Canada (NFTC) program, where CAE provides ground-school classroom and simulator training, and supports the live-flying training of military pilots in Moose Jaw and Cold Lake, Alta.
Even without those new awards, the company's backlog had been rising at an impressive rate. As of Dec. 31, the end of the company's fiscal 2017 third quarter, it stood at just under $7.4-billion, a record, up from about $6.4-billion at the same date the year before.
Revenue for the quarter was $682.7-million, up almost 11 per cent from the previous year. Earnings per share from continuing operations came in at 25 cents, up from 21 cents in the third quarter of fiscal 2016.
Since the beginning of 2016, CAE stock has been steadily trending higher, reaching a high of $20.72 in mid-February before retreating to the current level. The shares pay a small quarterly dividend of 8 cents (32 cents a year) to yield 1.6 per cent at the current price.
To sum up, this company offers good growth potential and some modest income.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to buildingwealth.ca.
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