A CAE flight simulator at the Lufthansa Flight Training (LFT) centre in Berlin, November 1, 2012.THOMAS PETER/Reuters
Investors looking for an alternative play in the turbulent aviation industry are eyeing CAE Inc. as it racks up record sales for its flight simulators.
CAE shares hit their highest level since mid-2007 on Tuesday after the company announced it sold another five full-flight simulators to Air Canada and four other undisclosed customers across North America and Asia.
The latest contracts, valued at about $70-million in total, helped Montreal-based CAE reach an annual record of 43 sales, with more than two months left in its fiscal year.
CAE said it's seeing "unprecedented demand" for the equipment that helps train pilots, including in the growing Asian market.
At least two analysts responded Tuesday by increasing price targets and recommendations, citing a strengthening aerospace market. Airlines are buying more new planes to replace older models and support an increase in traffic, alongside an economic recovery in major markets such as the United States.
"This is a very positive backdrop for CAE's aviation segment where there remains sufficient runway for utilization rates to improve," BMO Nesbitt Burns analyst Fadi Chamoun said in a note Tuesday, while increasing his target price to $15 from $13.50 and maintaining an "outperform" rating.
He is one of six analysts with a "buy" or equivalent rating on the stock, while seven say "hold" and two "sell," based on data from S&P Capital IQ.
CAE stock closed up 2 per cent at $14.55 on the Toronto Stock Exchange.
The company's simulators are used in the civil and military aviation sectors, with a small but growing segment in areas such as mining and health care. The company also offers training services. The civil business accounts for about 55 per cent of its revenues, while the military division is about 40 per cent.
Credit Suisse analyst Hamzah Mazari believes the civil training business will drive future growth at CAE as a result of the growth in emerging markets, while new opportunities servicing the mining and health care sectors will continue to expand. "The most unique part about CAE is that it is a pure play simulation asset and is extremely well diversified geographically," he said in an e-mail.
CAE says about 30 per cent its revenue is from the United States, 31 per cent from Europe and the rest from Asia and other parts of the world, including Canada.
National Bank Financial analyst Cameron Doerksen hiked his target price to $17 from $12 Tuesday and raised his recommendation to "outperform" from "sector perform" as a result of the simulator sale news.
He also sees more certainty in the company's military division, despite the effects of sluggish spending from governments, and improvement in its training operations.
"Admittedly, we are somewhat late to the game in becoming more positive on the stock, but with a number of positive developments recently and exceptional visibility in the company's civil businesses, positive momentum is building," Mr. Doerksen said in a note.
He noted CAE shares "are not cheap," but believes the higher multiple is justified.
CAE is trading slightly above some of its industry peers when measured by enterprise value – the market value of all its shares plus the company's net debt – in comparison to its earnings before interest, taxes, depreciation and amortization. It has an EV/EBITDA ratio of about nine, compared to six times for other aerospace companies such as Bombardier Inc. and Magellan Aerospace Corp., according to S&P Capital IQ.
While CAE shares have gained nearly 30 per cent in the past three months alone, BMO's Mr. Chamoun believes the valuation is still attractive at 17.6 times earnings.
"We note that later cycle aerospace companies such as CAE have typically traded at a premium to the overall market of up to 20 per cent," he noted. "The current valuation premium to the market of 7 per cent shouldn't dissuade investors."
Michael Sprung, president of Sprung Investment Management, said his company has owned CAE shares for about three years as a way to invest in the aviation industry, without taking on the same risks as owning an airline stock.
It's one of the company's main holdings in the industrial sector.
"I think people are just beginning to recognize the potential," he said.