August 13, 2009 / 6:53 PM / 9 years ago

BUY OR SELL-Are military aviation orders enough to carry CAE?

* Say shares are undervalued and will rise with recovery

* Bears don’t see recovery in civil market any time soon

* Say military orders may begin to drop off

By John McCrank

TORONTO, Aug 13 (Reuters) - The embattled civil aviation market has been a headwind for Canada’s CAE Inc (CAE.TO) (CAE.N), but the flight simulator and aviation training company’s deepening foray into military services has aided its performance.

The Montreal-based company, which has training locations in 20 countries, reported its quarterly results on Wednesday, showing little change year over year on earnings that were slightly ahead of forecasts after stripping out restructuring charges. [ID:nN11440611]

A 27.5 percent jump in revenue from military orders mostly offset a 19.9 percent drop from the civil market.

With the timing of a recovery in the aerospace sector still uncertain, is now a good time to buy the company?


“We believe the main message of the quarter is that CAE results are not about to collapse,” said David Tyerman, an analyst at Genuity Capital Markets, who recommends buying CAE.

He said CAE’s share price reflected expectations of a significant decline in earnings per share, but the potential for solid results through the downturn will help the company’s valuation level.

Jacques Kavafian, an analyst at Research Capital Corp, also likes the stock. He said CAE’s backlog would help stabilize its earnings, which should help it fare better than it did the last time the aviation market went south.

“This is the first economic downturn for CAE since management refocused the business into civilian and military training,” he said.

CAE had a backlog of C$3.28 billion at the end of the quarter. Military orders made up C$2.07 billion of that.

Kavafian said CAE was an attractive buy, as the stock will benefit as economic recovery takes hold and the civil segment recovers.

“CAE typically lags an economic recovery by about 12 to 18 months; however, it will eventually recover.”


Analysts agree that the civil aviation market is important to CAE’s performance, but some don’t see a recovery happening in that sector any time soon.

Scott Rattee, an analyst at Blackmont Capital, rates the stock “underperform,” with an above average risk.

“We do not foresee an imminent upturn in the aviation industry and expect the difficult environment to pressure CAE’s financial results into fiscal 2011,” he said.

Rattee added that although CAE’s latest results were positive, “we remained concerned that the full impact of the downturn has not yet been reflected in CAE performance.”

Daniel Kim, an analyst at Paradigm Capital, has a “hold” rating on the stock, but his concerns go beyond the civil sector.

“We believe CAE’s business will be assaulted on all fronts, first in its civil simulation products, then in civil training services,” he said. “While the military business should provide CAE with a buffer, we believe it is only a matter of time before we see this business start to slip as well.”

    $1=$1.09 Canadian Reporting by John McCrank; Editing by Frank McGurty

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