How Boeing’s Max jet troubles helped boost shares of Canadian flight simulation company

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After Boeing Co. recommended this month that all pilots of its 737 Max planes get training on flight simulators before the grounded aircraft return to the skies, CAE Inc. shares surged to record highs.

The reason? The Montreal-based flight simulation company has found itself in a sweet spot amid a swell of interest in its pilot-training services and technology. Now, though, investors are facing a tough question: How much further can this rally go?

CAE doesn’t usually attract a lot of attention, given that flight simulation is routine training. As well, the $10.4-billion company (based on the value of its outstanding shares) is relatively small compared with most aerospace and defence companies.

Boeing is lifting CAE’s profile though. Boeing has been embroiled in a financial mess since aviation authorities worldwide grounded the 737 Max – the aerospace giant’s bestseller – 10 months ago after two fatal crashes within five months.

The latest word is that the planes could return to service this year. And Boeing is now recommending that pilots train in flight simulators first, reversing an earlier position that simulator training wasn’t necessary for the 737 Max.

Investors pounced on the news. Although CAE shares have been climbing nicely over the past four years, reflecting the stronger financial health of airlines and a rotation into newer planes, the latest uptick is dazzling.

The shares have bounced 8.4 per cent since Jan. 7, when Boeing made its recommendation on training. They closed Friday at $39.03, up 1.4 per cent on the day to a fresh record high.

Now what?

CAE will report its third-quarter financial results for fiscal 2020 on Feb. 7, when its exposure to Max training will undoubtedly be a hot topic among analysts. That leaves about two weeks of speculation.

The company’s official statement on the subject of the Max is encouraging: “CAE is currently providing support to Boeing and our airline customers on the 737 Max. We are positioning ourselves to be ready when the Max returns to service by adding capacity in our network and by developing augmented training solutions.”

But the significance of the 737 Max simulators and training has to be weighed against the overall size and diversification of CAE – a company that has moved well beyond civilian aircraft and into defence and even health care. In 2018, it expanded into private planes when it acquired Bombardier Inc.’s Business Aircraft Training division for US$645-million.

In its second-quarter financial results, released in November, CAE said it had booked orders for 11 full-flight simulators. Just one was identified as a 737 Max (sold to Alaska Airlines).

That brought the total number of Max orders to 48, compared with sales of more than 1000 full-flight simulators to airlines globally, across plane types.

It’s a safe bet to presume that more 737 Max orders are on their way, but their impact on CAE’s financial results might not be the gold rush that investors are expecting. After the latest rally, the shares trade at about 31 times reported earnings, implying that big hopes for big profit growth are already factored into the share price.

The better plan may be to focus less on the 737 Max and more on CAE’s long-term potential.

The share price is already above RBC Dominion Securities analyst Steve Arthur’s 12-month target price of $39. But in a note released this month, Mr. Arthur examined CAE’s five-year prospects and liked what he saw.

Given CAE’s commanding 70-per-cent market share in flight simulator equipment, strong barriers to entry and expanding civilian fleets, he can see the company’s annual revenue increasing by an average of 8.4 per cent a year and earnings per share rising by about 14 per cent a year.

As a result, Mr. Arthur expects that CAE’s share price could trade between $55 and $60 in five years, implying additional gains of 41 to 54 per cent over this period.

That looks like a good reason for long-term investors to hold on – even if expectations tied to 737 Max training prove disappointing.

Editor’s note:

Editor’s note: An earlier version of this article said that CAE had 299 full flight simulators in operations worldwide. This figure pertains only to CAE’s training network. The company has sold more than 1000 FFS globally.