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CAE and Walt Disney take pandemic’s full force

Both companies are hanging on, but have best in class assets and good long term prospects

As we muddle through in this pandemic year, the economy has evolved with three distinct tiers.

One tier is in depression, including travel, tourism, aviation, aerospace, sports and live entertainment. Expect bankruptcies and consolidation this fall. Many survivors of the first wave may not survive the second. The survivors will bigger, stronger, leaner, and better financed.

Another, including banks and financial services and some bricks and mortar retailers and fast food restaurants are muddling through.

A third group with businesses that play to the stay-at-home trend including telecoms, home and garden, communication and online shopping are doing just fine.

Here’s a look at two companies just hanging on, but with good long term prospects.

CAE (TSX: CAE) Montreal’s CAE is the world’s largest maker of flight simulators for civilian and military use. About 90% of revenues come from outside Canada with a large portion in emerging markets. Commercial aviation is about 55% of revenue, military is 45%, and healthcare and medical simulation about 5%.

Pre-COVID 19, CAE trained more than 100,000 pilots and aircrew a year at 67 training centres worldwide.

CAE has had a miserable year. It suspended its dividend in the spring, revenues in the latest quarter were down by a third and it swung from a profit to loss. The loss was higher than the consensus estimate. Its training facilities operated at 33% of capacity as airlines reduced pilot training given that fewer planes were in the air. CAE cut costs, did a round of layoffs and shut some facilities.

The shares are down 45% this year trading at $18.99 at the time of writing.

CAE is still a great company with good long-term prospects. And there is also good news. Defense-related revenues have held up well and those training facilities are operating at near capacity. Longer term trends are favourable too. Rising incomes in emerging economies means more air travel, more pilots, and more need for pilot training.

When civil aviation recovers, so will CAE.

Walt Disney Co. (NYSE: DIS): Disney, like CAE, has taken the pandemic on the chin. The worldwide entertainment conglomerate is synonymous with family-friendly animated and live action fare. At the end of 2019 it employed 223,000 people and had revenues of US$69.5 billion.

Theme parks account for about a third of revenues and the pandemic shut them this spring. Tuesday, Disney announced it is laying off 28,000 employees from its theme park business. Its cruise ships are idle and its hotels mostly empty. Its media assets, including ABC television and cable TV stations such as ESPN have muddled through, but advertising revenue is way down, leading to a US$4.86 billion write-down of these assets in the latest quarter.

Its film studios including 20th Century Fox, Pixar, and Lucasfilm, have been unable to screen many movies. Disney also suspended its dividend in the spring. 

In its latest quarter, revenue fell 42% to US$11.8 billion and earnings by 86% before extraordinary items to $0.08 a share. After extraordinary items to do with its purchase of 20th Century Fox, it lost US$4.7 billion.  

The 1937 film Snow White and the Seven Dwarfs is Disney’s highest grossing movie of all time. Source: Walt Disney Studios

The only segment to see growth was its streaming services, which have 100 million subscribers, including Disney+, Hulu, and ESPN+. Disney+ accounts for an impressive 57.5 million subscribers, less than a year after launch.

Despite all the bad news, Disney’s shares are down just 13% this year. When I wrote about the company in May, Disney was trading at US$117. Since then the shares have moved higher by 7%, to the US$125 range.

That’s high, given the bumpy road ahead. Customers are unlikely to return to its parks in great numbers or go to the movies until a vaccine becomes available. That’s mid-to-late 2021. Disney’s third quarter which ends this week will offer better guidance. 

The longer-term picture is bright because Disney’s assets are best in class. As with CAE, recovery from the coronavirus will take time and patience.

Adam Mayers writes about investing and personal finance. He is a contributor to the Globe & Mail’s Globe Advisor and a contributing editor to Gordon Pape's Internet Wealth Builder newsletter. Adam was Business Editor and investment columnist at The Toronto Star and is the author of six books.

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