CAE gets upgrade from RBC

CAE Inc. was upgraded to outperform from sector perform by RBC Capital Markets because of its attractive valuation and anticipated margin improvement.

Analyst Steve Arthur noted the flight simulation equipment and pilot training company has spent several quarters restructuring and streamlining operations, including the relocation of approximately 20 simulators from areas with overcapacity to regions with stronger demand.

“We believe that much of that work is now complete, and we should see these redeployed simulators begin contributing materially to revenue and margins in the second half of fiscal 2014,” Mr. Arthur said in a research note.

Montreal-based CAE hiked its quarterly dividend by 20% to 6¢ on Wednesday after re- porting second-quarter revenue of $487-million, which was below analysts’ estimates of $534-million.

Mr. Arthur noted the miss was largely due to a 6% yearover-year decline in civil revenues, which came as little surprise given the ongoing simulator redeployments. Adjusted earnings per share of 15¢ was in line with analysts’ forecasts.

The analyst noted recent operational issues have caused CAE to lag its peers and the stock now trades at a material discount to the aerospace and defence group.

“We expect that CAE shares will react positively to growing evidence of operating margin improvement, and suggest that investors build positions ahead of that,” Mr. Arthur said, raising his target price on the stock to $14 from $13.