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What are we looking for?

Companies in the Canadian aerospace and defence sector have seen their stock prices decline anywhere up to 75 per cent over the past year. Today we’re looking for companies in the sector that may show significant upside over the next 12 months.

Aerospace is under enormous pressure because of COVID-19, but there will be an upside at some point. In digging deeper into industries like this, we are looking for truly undervalued opportunities – with the understanding that turnarounds take time. If you are a patient and diligent investor, finding companies like this could pay off well over the longer term.

The screen

We used StockCalc’s screener to select the 10 largest aerospace and defence companies on the Toronto Stock Exchange and the TSX Venture Exchange. (Note some of these companies are very small with market capitalizations in the $10-million to $15-million range.) We then use StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see whether they are undervalued or overvalued compared with their price. We calculated fundamental valuation for each stock in this portfolio using standard techniques including discounted cash flow, comparables and adjusted book value.

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Discounted cash flow (DCF value) is a valuation technique where cash flow projections are discounted back to the present to calculate value per share. A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies. An adjusted book value (ABV) is calculated by multiplying book value per share by its historical price-to-book ratio. If we have analyst coverage we include the consensus target price in our analysis.

More about StockCalc

StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. StockCalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to StockCalc using the promo code Globe30.

What we found

You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The StockCalc Valuation column is a weighted calculation derived from the models and analyst target data.

CAE Inc., which provides simulation technologies and training services to airlines and aircraft manufacturers, defence customers and health care specialists, said in early April it was temporarily laying off about a quarter of its staff, cutting salaries and suspending its dividend and share repurchase plan in response to COVID-19.

On June 17, CAE said its Air1 ventilator had been certified by Health Canada, two months after the company signed a contract with the government of Canada to manufacture and supply 10,000 ventilators. While CAE still has more than two-thirds of its revenue from the aerospace sector, this is a great example of the adaptability some companies have shown during COVID. Given the current environment and projections, the models and analyst consensus all show support for CAE’s stock price at $23.89 or above, implying good upside over the next 12 months.

Plane and train maker Bombardier Inc. is another interesting company. What jumps out in the analysis is the negative adjusted book value. When book value is negative the liabilities on the balance sheet exceed the assets there. We need to rely on other valuation methods and spend time looking at the balance sheet and company debt before investing. The models are showing a huge range for this stock, which means there could be a large potential swing in price either way. This is not a stock for a risk adverse investor.

It’s also worth noting that only one of the companies on this list (Magellan Aerospace Corp.) pays a dividend, and half of the firms listed do not have analyst coverage owing to their small market caps. Buying small companies like this demands a lot of research.

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Investing involves risk, especially for volatile stocks such as these. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.

Select Canadian-listed aerospace & defence stocks

CompanyTickerMkt. Cap. ($ Mil.)Recent Price ($)StockCalc Valuation ($)Difference (%)DCFPrice Comps.Adjusted BookAnalyst Target ($)1Y Rtn. (%)Div. Yld. (%)
CAE Inc.CAE-T5,242.019.7323.8921.137.1624.4026.4323.89-44.1n/a
Bombardier Inc.BBD-B-T1,092.00.430.8393.75.420.00-14.150.83-80.2n/a
Magellan AerospaceMAL-T379.06.528.4930.26.353.5023.339.92-58.86.4
Heroux-Devtek Inc.HRX-T343.09.4412.0928.03.19-0.3813.5914.67-52.3n/a
Firan Technology GroupFTG-T34.01.533.98160.1-0.270.733.954.00-60.3n/a
Mission Ready SolutionsMRS-X26.00.140.142.4-0.410.100.14n/a-37.8n/a
A2Z Technologies CdaAZ-X15.00.330.20-37.3-1.010.490.70n/a54.8n/a
FLYHT Aerospace Sol.FLY-X13.00.500.6223.4-0.360.415.70n/a-68.4n/a
Avcorp IndustriesAVP-T11.00.030.07146.4-0.970.00-0.21n/a-40.0n/a
BPLI HoldingsBPLI-X9.00.090.08-7.90.260.040.11n/a-14.3n/a

Source: StockCalc

Brian Donovan, CBV, is president of StockCalc, a Canadian fintech based in Miramichi, N.B.

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