Stock of the week: CAE Inc.Stock of the week: CAE Inc.
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CAE Inc. (TSX-CAE, $8.50) has largely completed its restructuring
plan. This greatly improved the company's profit in fiscal 2006 and
should lead to further earnings per share gains this year and next.
The shares remain on buy for further recovery and long-term gains.
In the year to March 31, CAE earned $86.8 million, or 35 cents a
share, excluding one-time items. This was up sharply from about $47
million, or 19 cents a share, a year earlier and again excluding one-
time items.
In fiscal 2006, revenue increased by 12.3 per cent, to $1.1 billion.
What's more, this increase was broad-based across all four of CAE's
divisions.
Revenue in the Civil Training & Services division rose five per cent,
to $322 million. This reflected a recovery for commercial airlines and
more training by actually flying planes.
Revenue in the Civil Simulation Products division jumped by 20 per
cent, to $257 million. CAE won orders for 21 full-flight simulators.
Revenue in the Military Training & Services division grew by seven per
cent, to $201 million. American and German bases required a higher
level of maintenance and support services.
Finally, revenue in the Military Simulation Products division advanced
by 17 per cent, to $327 million. This came from work on a German
project, the integration of the acquired firm Terrain Experts and
filling orders won late in fiscal 2005.
CAE's costs increased less than revenue last year - raising profit.
That's because it drastically cut its costs by setting specific
financial targets and making its cost structure leaner. To implement
efficiency on a company-wide basis, CAE introduced Kaizen and Six-
Sigma workshops.
CAE also reduced its workforce. For one thing, it eliminated regional
managers at its Civil Training & Services division. For another thing,
it reduced the scope of its main manufacturing plant by 10 per cent.
The company also consolidated its training centres in the U.S. and
Western Europe.
CAE has cut costs by buying what it needs on a global basis. It also
took steps to "encourage synergies between the Military and Civil
business units". All told, the company hit its cost savings target in
fiscal 2006.
Another thing to note is that CAE chopped its interest cost by almost
half. That's because it repaid debt of $68 million. With only $261
million of long-term debt left, the company's debt-to-cash-flow ratio
is now a comfortably-low 1.7 times. At the same time, the company's
cash has risen by $24 million, to $81.1 million.
CAE's higher profits are confirmed by a 54 per cent jump in its cash
flow last year, to $155 million. This exceeded capital spending of
$131 million and dividend payments of $9.7 million. So CAE's balance
sheet should further improve.
The outlook for CAE is favorable. In fiscal 2007, revenue should rise.
For instance, it hopes to sell more than the 21 full-flight simulators
that it sold last year. With seven orders for full-flight simulators
so far in the first quarter, the company is set to achieve this goal.
It added new $1.2 billion in new orders last year - more than its
revenue. And its order backlog stands at $2.5 billion. The only
problem is that the rise in the loonie against the U.S. dollar, the
Euro and the British pound knocked $176 million off the backlog.
The fact is, CAE is adversely affected by a rise in the loonie. Then
again, the company generates 95 per cent of its revenue from customers
in over 40 countries. This reduces its dependence on any one region.
While CAE's revenue should rise further this year, its costs should
again rise more slowly. This year the company expects its cost savings
to come close to $60 million - most of the way to its initial target
of $65 million a year. So profit should increase again. In fact, CAE
is expected to earn 44 cents a share this year and 57 cents a share
next year.
From a longer-term perspective, CAE is investing for future growth.
Its 'Phoenix' project involves $630 million in research and
development. This should assist the company in maintaining its
technological edge. The federal and Quebec governments are putting in
$189 million and $31.5 million, respectively.
Meantime, CAE is building a business aviation facility in the U.S. and
plans to expand one training centre in the U.K. and another in China.
CAE remains a buy for long-term gains as aviation markets recover.
(Click below for a profile of this week's stock.)
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