Should you buy CAE Inc.? (TSE:CAE)

My top, top patron asked me a question today: whether or not you should invest in CAE Inc., perhaps one of the most known Canadian companies.

While CAE Inc. does many things, it is certainly most known for its flight simulators. In addition, it builds some things for the healthcare industry and also the defense industry.

CAE Inc. is a fine company with fine products. As far as flight simulators go and as far as I understand it, they make some of the best stuff in the world. They enjoy an excellent reputation and I think it’s one of the most solid product line in the simulation industry (which is, by the way, massive). Pilots use them, defense industries use them, etc.

Despite all that, I would not invest in CAE Inc. today. To me, it provides too little and brings too much risk. At a $5B valuation, it remains a minor player and I fail to see the path it could take going forward. With a tiny dividend of 1.47% and a valuation that doesn’t exactly ring “cheap,” I plain and simply do not see enough reasons to buy it today.

Make no mistakes: its products are excellent. And for all things worth, I think they will keep doing very well. But over the past couple of years, it has simply trailed its competitors and other major players in the defense industry by a wide margin:

In fact, CAE has barely outperformed the SPY during that period, despite being much more risky. In clear terms: it has not delivered the goods. And given their relatively small size, I would consider it an above-average risk. Yes, I know they make most of their money from civil flight simulators, but the point remains it is trailing even players that are much bigger, something you plainly do not want to see.

Is it time for CAE Inc. to shine soon? Maybe. I have no idea. Maybe they are about to double or triple in size, I don’t know. For all it’s worth, what they are doing is very hard to copy or imitate and I think they have a lasting business appeal. But there are better investments opportunities in that sector and without a clear reason to invest in the company, I’m simply not going to. Of course, I know nothing about simulators and planes and stuff like that, and maybe an elite engineer could see an opportunity in CAE Inc., but I don’t. It’s not my sector.

CAE Inc.’s valuation today already has a lot of growth priced in. It’s a rich valuation that perhaps make sense, but I fail to see how CAE Inc. could be underpriced today since it’s trading at 23 times its earnings. For the comparison, United Technologies, a much bigger and much more diversified company ($97B) trades at 18 times its earnings.

For those reason, I would rate this a “hold.” Too small, underperforming for too low and no reason to buy now. Better opportunities in that sector IMO.

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