Investors could be “significantly” undervaluing CAE stock, a Canadian aerospace training and simulation company, according to Goldman Sachs. In a recent report, the Wall Street investment bank reiterated a buy rating on CAE, which operates two primary businesses: civil aviation and defense. Shares of CAE in the U.S. have slipped 11% in 2024, but analyst Noah Poponak’s 12-month price target of $26 implies that the stock could rally nearly 35% from its Monday close. CAE YTD mountain CAE YTD chart “CAE is the market leader in commercial aviation simulation & training, which is a highly regulated, recurring, and high margin business,” the analyst wrote. “However, the company’s defense business, which we forecast will account for only 20% of CAE’s total EBIT in the future, has been a drag on profitability as the company has taken charges and highlighted challenged contracts.” Poponak noted that valuations for the stock have now pulled back to a “sizable discount” as compared to other peers in the aerospace supply chain, with the analyst’s sum of the parts analysis implying the stock is trading nearly 50% below fair value. In the report, Poponak analyzed both CAE’s civil aviation and defense businesses in isolation and compared to competitors. As a catalyst for CAE’s civil aviation business, he underlined the company’s dominant market share and historical growth profile, which has been above the average in Goldman’s universe of aerospace suppliers. “CAE’s size is a competitive advantage because it provides better data quality for customers and can offer more competitive pricing. That provides inorganic growth opportunities for the business over time, illustrated by the company’s nearly 10% total growth over the past 20 years ( > 14% when excluding [the Global Financial Crisis] and Covid downturns),” he wrote. The civil aviation segment’s growth and margin profile isn’t accurately reflected in CAE’s current valuation multiple, the analyst added. Although CAE’s defense business has struggled in recent years, Poponak believes that idiosyncratic growth drivers could help push it to grow at an average rate of 4% per year through 2027. As a catalyst, he pointed to shifts in today’s geopolitical landscape that would lead to “technology adoption that requires training in a simulated environment that can interact with sea, land, air, and space platforms simultaneously.” “CAE’s defense business has seen margin contraction over the last decade as its mix has shifted to lower margin work and it acquired the L3 Harris military training business,” including some unprofitable contracts, the analyst wrote. “That said, management has recently provided more details regarding the duration and quantity of these contracts, and we do not see a fundamental reason that CAE defense can not have growth and margins in-line with the industry over time.” CAE’s valuation seems to reflect that investors have assigned the defense business little to no value, Poponak wrote. — CNBC’s Michael Bloom contributed to this report.
