The stock price of CAE Inc. , Canada’s shining star in the world of modelling, simulation and training for civil aviation and defence, has been whacked over the past few months as investors grow increasingly nervous about the prospects of U.S. defence spending cuts.
Since its near term peak at the end of June, the stock has dropped 27 per cent, while the Toronto Stock Exchange and the S&P 500 are down about 11 per cent over the same period.
Now that the U.S. debt super committee has failed to reach a deal, you would assume there will be even more pressure on the stock, especially because one-third of the company’s military sales are to the U.S. However, CIBC World Markets analyst Michael Willemse crunched the numbers and found drastic spending cuts shouldn’t hurt the firm too badly.
For starters, the stock has already taken a hit, so it’s harder for it to keep falling. On top of that, Mr. Willemse assumed that even a 9 per cent cut to U.S. defence spending would put only one 1 cent per share of CAE’s earnings per share at risk, translating into 12 to 23 cents of CAE’s share price. Not very much.
Mr. Willemse believes CAE has reason to be hopeful. If the cuts do come, they will be enacted in 2013, and as of right now, only 15 per cent of CAE’s 2013 estimated revenues come from U.S. military spending. Moreover, the “risk of cuts to military simulation training is low given its inherent cost savings,” he noted.