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As CAE Stock Jumps 7% on Earnings News, Investors Should Get Ready for More Gains  

Will Ashworth

Published: August 11, 2023 6:55 am

Last Updated: August 11, 2023 12:11 pm

CAE Inc. (CA:CAE, US:CAE) reported outstanding first-quarter 2024 results on Aug. 9.

Cue the puns: The flight simulator company’s shares took off, climbing more than 7%

But the journey isn’t over (right, more puns…)  There’s plenty ahead for investors to be excited about. You might want to consider CAE stock for your portfolio if you don’t own the name. Up nearly 21% year-to-date, the Quebec tech maker looks ready to head back to the $40s where it last traded in November 2021.

Here’s why.

Record Backlog

Forget about the revenue or earnings growth in 2024’s first quarter and focus on the company’s backlog. It finished the quarter with an adjusted backlog of $11.2 billion, 12% higher than in the year-earlier period and a company record. 

“We made excellent progress in the quarter to secure CAE’s future with over $1 billion in total adjusted order intake, for a record $11.2 billion adjusted backlog,” stated CAE CEO Marc Parent.

The company’s Civil Aviation unit’s backlog in the quarter was $5.8 billion, 15% higher than a year earlier. Its Defense and Security backlog was 8% higher at $5.4 billion, with $8.8 billion in bids and proposals pending.

CAE’s Defense segment is in the midst of a transformation to become a more profitable business. The record backlog from the unit was impressive. Speaking of Defense, it’s also worth noting that the Invesco Aerospace & Defense ETF (US:PPA) has CAE stock in its top 20 biggest holdings, at 1.83% of the fund.

“In Defense, performance was in line with our expectations and we’re making excellent progress to transform our business, as particularly demonstrated by our recent large strategic program wins and record $5.4 billion Defense backlog. These involve larger and more profitable opportunities that we now have the capabilities to bid and win,” Parent stated in his prepared remarks segment of the Q1 2024 analyst call.

As for its Civil Aviation business, it’s just getting started. Parent told call participants that worldwide passenger traffic is up 58% from last year. More importantly, Asia’s international traffic is 75% below pre-pandemic activity. Once this recovers, the need for flight simulators and training will undoubtedly rise.

Happy Analysts

Analysts were quick to boost their price targets in the wake of the Q1 earnings. TD Securities raised its target price by $2 to $39, The Globe and Mail reported. CIBC and the National Bank of Canada raised their targets by $1 to $38. According to The Globe, the median target is $36, 13% higher than its current share price.

BMO analyst Fadi Chamoun raised his target price by $2 to $37. He believes his target could be conservative.

“In light of the strong start to FY24, positive demand environment for Civil and Defense, fading headwinds from underperforming Defense contracts going into late FY24 and FY25, we sense that CAE is well-positioned to potentially outperform its FY24 target…  “We believe that improving Defense margins, free cash flow, and return on invested capital alongside reduced leverage could support a higher valuation scenario of up to $42,” Chamoun told clients, per The Globe report.

It’s clear from analyst comments that the Civil division is performing at a very high level and should continue to do so while its Defense business is making steady improvements.

The Civil Aviation business experienced a 12% increase in revenue in the first quarter, with a 40% increase in its operating profit. Its adjusted operating income margin improved by 400 basis points to 22%. Its Defense business had a 5.2% operating margin, up from -5.1% in Q1 2023.

If its Defense business continues to improve, a $40 share price could be in the cards by the end of calendar 2024.

This article originally appeared on Fintel