2023-08-17 08:34:26 ET
Summary
- CAE Inc. reported Q1 FY2024 earnings that beat expectations on both top and bottom lines.
- The company's revenues increased across all segments, with significant growth in Civil Aviation and Defense.
- CAE aims to grow its EPS by a compound growth rate of mid-20% between FY22 and FY25, supported by strong performance in its segments.
CAE Inc. (CAE) reported its Q1 FY2024 earnings on the 9th of August, beating expectations on top and bottom lines. As a provider of simulators, modeling technologies, and training services to airlines, aircraft manufacturers, defense customers, and healthcare specialists, I believe that CAE Inc. is positioned extremely well to play a meaningful role in supporting the increasing demand for air travel and pilot training. Since initiating coverage with a Buy rating, the stock has gained 18% compared to 5.4% for the broader market.
In this report, I will be having a look at the results for CAE Inc., the outlook, and provide a price target update for the stock.
Amounts mentioned in this report are in Canadian dollars, unless mentioned otherwise.
CAE Stock: Growth In Civil Aviation And Defense
Across all segments, CAE booked 13% higher revenues and saw a 138% or $84.2 million increase in adjusted segment profits. Civil Aviation revenues grew 12% to $540.3 million, driven by higher utilization rate on the simulators and more simulators active in CAE's network. Adjusted profits were up $32.4 million or almost 37.5% on higher volumes, higher utilization and a more favorable trainings services mix. Furthermore, flight operations solutions added more profits to the business, partially offset by lower simulator deliveries, which fell from 10 to 6.
Defense revenues increased 14% or $58.4 million. More importantly, its adjusted segment result improved by $45.5 million driven by better profitability on the North American programs and last year's first quarter results were heavily impacted by unfavorable contract cost adjustments and higher costs related to expanding the defense pipeline.
Healthcare is the smaller segment, representing only 4% of the revenues. So, the segment is not going to move the needle for CAE, but its revenues were up 7% to $42.4 million and the adjusted result swung from a $4.5 million loss last year to a $1.8 million profit this year due to lower cost of sales and lower R&D costs.
Year-over-year, the backlog has increased 12%, and during the quarter, Civil Aviation obtained contracts that will generate $730.2 million in future revenues while the Defense segment secured contracts that will generate $237.7 million in revenues plus $779 million in unfunded backlog.
The Outlook For CAE
CAE aims to grow its EPS between FY22 and FY25 by a compound growth rate of mid-20% supported by continued strength in the Civil Aviation segment, a transformation in Defense, and a larger scale of Healthcare. Civil Aviation is expected to grow above market rate as the recovery in air travel in Asia continues, while Defense supply chain issues are expected to ease to some degree. Unfortunately, there were no target numbers presented, but the mindset and strategy should position the company for growth.
Is CAE Stock A Buy?
During my previous report on CAE, I mentioned that I have little doubt that CAE is a buy. The company is a market leader for simulators and training services, and demand for those services will not decline in the foreseeable future. I estimated around 33% upside based on FY2024 earnings from $22 [USD] level that the stock was trading at back then and since then some upside has been filled to make CAE's stock trade more in line with its FY2023 earnings.
I believe that CAE stock currently is around 5% undervalued compared to its FY2023 earnings and with the FY2024 earnings in mind as well as some updates to our model, I continue to see around 30% upside for the stock, effectively increasing the price target to $31.67 [USD], which is higher than the 14% upside that polled analysts see.
Conclusion: CAE Is A Simulator Market Leader With Upside
CAE showed year-over-year improvement in its financial results, though it should be noted that last year's first quarter was filled with one-off negative items that made the comp quite easy for Q1 FY2024. However, the business is strong and demand for training in the commercial aviation field will only strengthen from here while CAE is also increasingly focusing on Defense and scaling up its Healthcare division. With the growing end markets in mind and CAE's superior positioning as a simulator and training expert, the business is aligned well to rewards its shareholders.
For further details see:
CAE: A Simulator Tech Giant To Buy