CAE Inc.: Navigating Near-Term Hurdles to Seize a Decade of Growth

The stock market often rewards companies that can balance short-term execution with long-term vision. CAE Inc. (NYSE: CAE) finds itself at this crossroads: facing near-term margin pressures and restructuring costs, yet sitting atop a record backlog and secular tailwinds in aviation and defense training. For investors willing to look past the noise of quarterly volatility, the path to outsized returns is clear.

The Short-Term Struggle: Margins Under Pressure, but Costs Are Coming Down

CAE’s first-quarter results for fiscal 2025 (ended June 30, 2024) revealed a company in transition. While revenue grew 6% to $1.07 billion, earnings per share (EPS) fell 25% to $0.15, and adjusted EPS dropped 13% to $0.21. The culprit? Margin compression in its Civil Aviation division, where operating income fell 11% despite a 9% revenue rise. Defense margins, however, expanded 14% to $27.8 million, driven by a 92% surge in backlog from a massive $11.2 billion Canadian training contract.

Yet the bigger story lies in management’s response: $14.8 million in restructuring costs this quarter, with another $20 million planned for Q2 to streamline operations. By 2026, these moves will generate $20 million in annual cost savings. This is a critical step toward stabilizing margins. As CAE CEO Marc Parent noted on the earnings call, “We’re prioritizing profitability over growth in the near term.”

The Long-Term Opportunity: Backlog Goldmine and Structural Tailwinds

The real engine of CAE’s future lies in its record backlog of $17.0 billion—a 52% jump from a year ago. This isn’t just a number; it’s a multi-year revenue runway. The Civil Aviation division’s backlog rose 14% to $6.6 billion, while Defense backlog exploded 92% to $10.4 billion. Even more promising: the Civil division’s book-to-sales ratio hit 1.31x in Q1, meaning demand outpaced revenue growth.

Consider the secular trends at play: - Aviation Recovery: Post-pandemic demand for flight training is surging, with airlines hiring 120,000 pilots globally by 2030 (per Boeing). CAE’s $6.6 billion Civil backlog includes contracts with Lufthansa, Delta, and Middle Eastern carriers. - Defense Modernization: Governments are doubling down on training systems to counter hybrid warfare. The Canadian contract alone represents a 15-year revenue stream.

Management’s targets are aggressive but achievable: Civil aims for 10% adjusted operating income growth and 22-23% margins, while Defense targets 6-7% margins. With $20 million in annual cost savings and a 150% free cash flow conversion target for fiscal 2026, CAE’s financials should stabilize by 使 the end of this fiscal year.

Valuation: A 3.4% Gain Hides a Compelling Case

At $25.35 per share as of May 7, 2025, CAE’s valuation appears modest. But the stock’s one-year forecast of $26.21 (a 3.4% rise) understates the potential. Here’s why: - Backlog-to-Revenue Multiple: CAE’s backlog is 3.6x its annual revenue. In a sector where backlog is king, this is a multiyear growth lever. - Earnings Turnaround: The current P/E ratio of ~40x (based on $0.60 annual EPS estimates for 2025) drops to ~22x if the 2026 EPS target of $1.20 is achieved. - Share Buybacks: CAE spent $11.7 million on repurchases in Q1 alone, signaling confidence in its stock’s undervaluation.

Risks and Why They’re Manageable

• Margin Volatility: The Civil division’s margin dip is temporary as legacy contracts wind down. The focus is now on higher-margin simulator sales and training services.
• Geopolitical Risks: While supply chain issues and inflation are concerns, CAE’s diversified customer base (30+ countries) and long-term contracts mitigate this.
• Tax Headwinds: The 25% projected tax rate is a drag, but CAE’s global operations and ESG initiatives (e.g., decarbonization, Indigenous partnerships) may unlock tax incentives or grants.

Conclusion: Buy the Dip, Hold the Trend

CAE’s stock has been a rollercoaster in May 2025, with prices fluctuating between $22.91 and $28.40. But the fundamentals are undeniable: a backlog that will generate ~$1 billion in annual revenue for years, margin expansion in defense, and a clear path to cost discipline. The $26.21 12-month target is conservative; if CAE hits its three-year EPS growth target of low-to-mid-teens, the stock could easily surpass $35.

Investors should buy CAE now at $25.35, using dips below $25 as opportunities to accumulate. This isn’t a “trade”—it’s a bet on the next decade of aviation and defense training, with CAE as the undisputed leader. The short-term pain is fleeting; the long-term gain is structural.