I don’t often write about Canadian stocks for Barchart.com. Still, when I read in The Globe and Mail that only three out of 238 stocks in the S&P/TSX Composite Index were at or near a Relative Strength Index (RSI) of 30 -- Anything at or below 30 is considered oversold -- I was more than curious if there were any that an American audience would appreciate.
Interestingly, the three at or near oversold territory are all traded on the NYSE. For my money, I’d focus on CAE (CAE), the Montreal-based manufacturer of flight simulators.
Here’s why I feel this way.
Business Is Picking Up
CAE’s woes stem from the fact it supplies flight simulators to the airline industry. While they are an indispensable product in the training of pilots, the pandemic wreaked havoc on its business because customers were drowning in red ink. It’s hard to sell someone something when they’re in survival mode.
Despite the troubles faced by the airline industry over the past 30 months, business today appears to be getting closer to pre-pandemic passenger levels. The only fly-in-the-ointment is that airlines have difficulty keeping up with the demand. Eventually, they’ll get there, and when they do, CAE will be more than ready to help out.
On August 16, CAE announced it signed an exclusive 15-year agreement with Qantas Group that will see it build and operate a Sydney pilot training center.
“CAE will operate a new 7,000 square-metre CAE Sydney Training Centre that is slated to open in early 2024,” the press release stated.
“In addition, CAE will deploy a new A320 full flight simulator and purchase the Qantas Group's B787, A330, and B737NG full-flight simulators and associated integrated procedures trainers for the new center.”
It goes on to say that it could expand the center to eight flight simulators, suggesting that a future order for four flight simulators could be in the works.
CAE reported Q1 2023 results on Aug. 10. They were a mixed bag.
On the top line, revenues increased by 24% to CAD$933.3 million ($722.33 million), from CAD$752.7 million ($582.55 million). Its Civil Aviation segment saw revenues increase 11% in the quarter. They accounted for 51% overall. Its revenues for Defense & Security increased 43% to CAD$413.3 million ($319.87 million), accounting for 44% overall. Its Healthcare segment accounted for the remaining 5%.
Its order backlog hit a record CAD$10.0 billion ($7.74 billion). It will be hectic over the next few years. That’s a big positive.
However, before it can get investors to buy its stock, CAE will have to right the ship from a profitability standpoint. More on that below.
CAE Stock Is Down More Than 18% YTD
CAE is down 18.4% YTD and 24.4% over the past 52 weeks. The index, by comparison, is off 4.7% YTD and 0.3% over the past year. It’s not even close.
Since CAE reported Q1 2023 results, its share price has lost almost 21% of its value. Before it announced earnings, it was in positive territory. A few defense contracts snafus later -- it had to take CAD$29.8 million ($23.06 million in charges in the first quarter -- and it’s down on the year.
CEO Marc Parent had this to say about the snafus in the company’s Q1 2023 conference call with analysts:
“Defense results were disappointing, however, coming in very well short of our expectations. The shortfall was mainly due to unanticipated discrete charges on 2 of our legacy programs and increased intensity of the Defense sector-wide headwinds that we’re facing in this early stage of our multiyear growth journey.”
The markets and analysts interpreted the situation as mis-bids by the company. However, the reality is that these things do happen occasionally. Parent, to his credit, admitted that in hindsight, it could have anticipated these issues earlier, possibly allowing it to fix the cost issues.
CAE will learn from this misstep.
In the meantime, the company had to lower its guidance for 2023 adjusted segment operating income growth to 25% or so, down from the mid-30s previously. Nonetheless, it remains confident that it will grow its earnings per share by 25% annually, give or take, between 2023 and 2025.
Further, it believes that all three operating segments have secular trends working in their favor over the next few years. Getting in while the situation is a little fuzzy provides investors with a risk/reward proposition that’s tilted in your favor.
The Bottom Line on CAE
CAE stock hasn’t traded this low since November 2020, 21 months ago. It currently has a price-to-sales ratio of 2.38. It last had a similar multiple in 2018.
According to Barchart.com’s analyst ratings for CAE, five rates it a strong buy, two a moderate buy, and two give it a hold. The mean target price is $30.15, 47% higher than its current share price.
The S&P/TSX Composite Index currently has an RSI of 68, just below 70, the point at which stocks become overbought. CAE, on the other hand, is teetering near oversold territory.
If it’s not a buy, I don’t know what is. Aggressive investors will be rewarded in 12-18 months.
CAE is about to take flight.
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