CAE Inc. Soars on Pilot Shortages and Defense Spending Surge

The aviation and defense sectors are undergoing a transformation driven by acute pilot shortages, surging defense budgets, and the need for advanced training systems. CAE Inc. (CAE), a global leader in simulation and training solutions, is uniquely positioned to capitalize on these trends. With a robust pipeline of contracts, a recent acquisition that promises low-teens EPS accretion, and margin expansion through restructuring, CAE presents a compelling investment opportunity. At its current price of $36.01, the stock sits well below a $40 price target, offering investors 33% upside.

The Tailwinds Driving CAE's Growth

1. Pilot Shortages Create a Lifelong Training Need

The International Air Transport Association (IATA) estimates that 264,000 new pilots will be needed by 2029 to meet rising air travel demand. This shortage has accelerated demand for CAE's training systems, which are critical for pilot certification and recurrent training. CAE's Civil Aviation segment, which accounts for over half its revenue, benefits from regulatory mandates requiring airlines to maintain simulator-based training.

CAE's training centers and full-flight simulators (FFS) are the gold standard in the industry. In fiscal 2025, Civil Aviation revenue rose 11% year-over-year, with an adjusted backlog of $8.8 billion—up 37%—reflecting long-term contracts and recurring revenue streams. The segment's margin held steady at 21.5%, supported by strong utilization rates (74-75%) and simulator deliveries.

2. Defense Spending Rises as Geopolitical Tensions Mount

Global defense spending is on an upward trajectory, with NATO allies committing to spend 2% of GDP on defense by 2024. CAE's Defense and Security segment, which has long struggled with legacy contracts, is now benefiting from this surge. The acquisition of L3Harris's Military Training business in 2021 added critical capabilities in fighter aircraft, submarine, and cyber training systems, enabling CAE to tap into high-priority programs like the U.S. Air Force's SCARS program and Canada's Future Fighter training initiative.

Defense revenue jumped 29% in Q4 2025, with an adjusted backlog soaring to $11.3 billion—a 97% increase year-over-year. The segment's margin improved dramatically to 7.5% in fiscal 2025, up from 0.8% in 2024, as restructuring and operational rigor resolved past inefficiencies.

The L3Harris Acquisition: A Strategic Masterstroke

The $1.05 billion acquisition of L3Harris's Military Training business has been a game-changer for CAE. The deal:
- Low-Teens EPS Accretion: Delivered in the first full year post-closing (2022), with cost synergies of $35–45 million annually by 2024.
- Margin Lift: Expanded Defense margins by reducing fixed costs and improving program execution.
- Strategic Scale: Gave CAE a foothold in U.S. defense markets, where it now serves 28 countries, including NATO allies.

The acquisition's true value lies in its alignment with secular trends. With defense budgets rising and military modernization a priority, CAE's position as a supplier of multi-domain training systems (air, land, sea, cyber) is virtually unassailable.

Margin Expansion: The Underappreciated Catalyst

CAE's restructuring efforts are delivering tangible results. By reducing debt, optimizing capital spending, and streamlining operations, the company has:
- Improved Consolidated Margins: Operating income surged to $729.2 million (15.5% of revenue) in fiscal 2025, up from a loss of $185.4 million in 2024.
- Strong Free Cash Flow (FCF): Hit $813.9 million in fiscal 2025—211% of adjusted net income—due to better working capital management and lower capex.
- Debt Reduction: Net debt-to-EBITDA fell to 2.77x, with a target of 2.5x by 2026, signaling financial flexibility for future acquisitions or buybacks.

The outlook for 2026 is equally promising:
- Civil: Mid-to-high-single-digit adjusted segment operating income (aSOI) growth with margin stability.
- Defense: Low-double-digit aSOI growth and margins of 8–8.5%, fueled by a $11.3 billion backlog.

Valuation: A Buy at 33% Upside

CAE's stock trades at $36.01, far below the $40 price target implied by its fundamentals:
- DCF Analysis: A 10% discount rate and 10-year growth assumptions yield a fair value of $42–$45.
- Multiples: CAE's EV/EBITDA of 9.5x is below peers (e.g., L3Harris at 12x), despite its higher margin trajectory.
- Catalysts: FCF generation, Defense margin expansion, and potential new contracts (e.g., U.S. Army's Next Generation Combat Training System).

Risks to Consider

• Macroeconomic Headwinds: Airline cost-cutting could delay pilot training investments, though regulatory mandates provide a floor.
• Geopolitical Uncertainty: A sudden reduction in defense budgets, though unlikely given current tensions.
• Execution Risks: CAE must maintain operational discipline to realize synergies and backlog opportunities.

Conclusion: Buy CAE for Long-Term Gains

CAE is a rare blend of secular growth, margin upside, and undervalued stock. With 33% upside to $40, robust FCF, and a strategic portfolio benefiting from pilot shortages and defense spending, it's a buy for investors seeking exposure to two unstoppable trends. The risks are manageable, and the rewards are substantial.

Recommendation: Buy with a $40 price target (33% upside). Hold for 12–18 months to capture margin expansion and backlog execution.