CAE: A Buying Opportunity in the Wake of RBC's Sector Perform Call?

The recent downgrade of CAE Inc. (TSX:CAE) (NYSE:CAE) to Sector Perform by RBC Capital Markets has sparked debate among investors. While the move highlights near-term valuation concerns, a deeper dive into CAE’s fundamentals reveals a company poised to capitalize on secular tailwinds in pilot training and defense spending. For long-term investors, this downgrade could mark a rare entry point into a stock with a record-breaking backlog and structural growth drivers.

The RBC Downgrade: A Valuation Call, Not a Fundamental Knock

On May 14, 2025, RBC analyst James McGarragle cut CAE’s rating from Outperform to Sector Perform, citing a “full valuation” and limited near-term catalysts. The firm argued that CAE’s shares trade at 27x fiscal 2026 consensus EPS, far exceeding valuations in aerospace and defense peers. However, this misses the broader narrative: CAE’s backlog and order flow suggest it is pricing in current expectations, not future growth.

The downgrade follows CAE’s stellar Q4 results:
- $289M free cash flow (up to $814M annually),
- $20.1B record adjusted backlog (a 65% YoY jump),
- $1.3B in new orders, driven by record Civil segment performance and a rebound in Defense.

While RBC highlights risks like supply chain bottlenecks and modest pilot hiring slowdowns in the Americas, these are transient issues, not existential threats. The Civil division’s Q4 operating margin hit 28.6%, and its backlog surged to $8.8B—a 37% YoY increase—reflecting strong demand for pilot training amid global pilot shortages.

Why the RBC Concerns Are Overblown

1. Defense Segment Dominance: CAE’s Defense business delivered 29% YoY revenue growth in Q4, with margins improving to 9.2%. With NATO nations pledging $300B+ in defense spending through 2030, CAE’s contracts with the U.S. Air Force, Canadian Armed Forces, and others are future-proofed.
2. Pilot Shortages Are Structural, Not Cyclical: Global airlines face a projected deficit of 40,000 pilots by 2030, driven by retirements and air traffic growth. CAE’s training centers—critical to certification—are irreplaceable infrastructure, creating a moat against competition.
3. Backlog as a Leading Indicator: CAE’s $20.1B backlog (vs. $12.1B in 2022) ensures visibility for years, shielding it from macroeconomic volatility. Even RBC acknowledged that CAE’s valuation “factors in long-term trends”—but this is a feature, not a flaw.

The Contrarian Case: CAE’s Valuation Is Already Discounting Risks

RBC’s price target drop to C$38 assumes CAE’s growth stalls. Yet:
- Peer comparisons are misleading: CAE operates in a high-margin, recurring-revenue business (training and simulation), unlike cyclical aerospace peers.
- Free cash flow is accelerating: CAE’s FCF rose 25% YoY in FY2025, and it aims to hit $1.0B annually by 2027.
- Analyst consensus remains bullish: While RBC cut its rating, National Bank Financial upgraded CAE to Outperform post-Q4 results, citing Defense margin upside and resilient Civil demand.

The Bottom Line: A Buying Opportunity at 11.4x EBITDA

RBC’s 11.4x blended valuation multiple assumes CAE’s growth peaks. But with:
- Defense spending surging in NATO and Indo-Pacific allies,
- Pilot training demand growing at 6% annually,
- A $20.1B backlog that requires CAE to deliver $2B+ in orders yearly just to stay flat,

this is a high-margin, low-risk compounder at a 10% discount to its peers. For investors with a 3–5 year horizon, the RBC downgrade is a gift—a chance to buy a $20.1B backlog business at 11.4x EBITDA, with double-digit FCF growth baked in.

Final Call: RBC’s Sector Perform Is a Sell Signal—For the Shorts

CAE’s stock may drift lower in the short term as RBC’s concerns weigh. But for those who understand backlog-driven industries, this is a once-in-a-cycle entry point. The secular tailwinds—defense, pilot shortages, and simulation-as-a-service—are too powerful to ignore.

Action Item: Use the dip to accumulate CAE. Set a target of C$50+ by 2027, with a risk-reward favoring buyers at current levels.

CAE’s valuation concerns are noise. The signal is its $20B backlog and structural growth drivers. Investors who look past the downgrade will be rewarded.