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CAE, Walt Disney have post-pandemic potential

CAE and Walt Disney have best in class assets, but have absorbed the full force of the pandemic. Better things lie ahead.

Both CAE Inc. and Walt Disney Co. have absorbed the full force of the pandemic and their fortunes have closely followed the lockdowns, reopenings and subsequent retreats caused by new pandemic variants.

Both have best in class assets. CAE is a global leader in civilian and military pilot training, while Disney is a Top 5 global brand with an unrivalled film and TV library.

Both suspended dividends 18 months ago and have used that cash to invest in core businesses. This has enhanced their long-term fortunes, but in the meantime conditions are challenging. Both companies need a full reopening to regain their pre-pandemic footing.

Here’s a closer look:

 CAE (TSX: CAE) Closed Friday at C$33.13 US$26.40.

 Background: Montreal’s CAE is the world’s largest maker of flight simulators for training civilian and military pilots. 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%.

Performance: CAE suspended its dividend in early 2020, shut facilities and undertook a round of layoffs. The shares fell from $41 to a low of $16, before rebounding to $34.50 by yearend.

In 2021, with rising vaccinations rates and optimism for a rebound in air travel, the shares hit a high of $41. Disappointing earnings and the Omicron variant sent shares tumbling by about 25% in November.

Recent Developments:  CAE’s second quarter fell short of expectations despite a rise in revenue and profit. Simulator utilization fell to 53 per cent of capacity due to lower demand from airlines for pilot training. Pandemic-induced delays in orders hurt its military training business, which account for half of its business.  Trailing twelve-month revenues of $3.3 billion have yet to reach the pre-pandemic peak of $3.6 billion.

CAE expects a rebound in its defence business and a full recovery in the civil aviation side of its business in the second half of 2022, fuelled by pent-up demand and contingent on fewer travel restrictions.

There is no indication when the dividend will be restored.

Discussion & Outlook: CAE used the pandemic to strengthen its leading position in flight training. It raised $1.5 billion and has made nine acquisitions in 18 months.  Most recently, it acquired Texas-based Sabre’s AirCentre for US$392.5 million. The unit includes software for carriers’ crew and flight management. 

The shares are 25% off their high with revenues and profits rebounding.  While the short term is choppy, CAE is well positioned to prosper as conditions improve.

Walt Disney Co. (NYSE: DIS): Closed Friday at US $151.94

Background: Walt Disney Co. is a worldwide entertainment conglomerate founded in 1923 whose business is synonymous with family-friendly animated and live action fare.   

Disney’s assets include theme parks and resorts, a cruise line, ABC Television, cable TV stations such as ESPN, and film studios that include 20th Century Fox, Pixar, and Lucasfilm. Its streaming services include its streaming services,   including Disney+, Hulu, and ESPN+. Disney+ accounts for an impressive 118 million subscribers, two years after its launch.

 Performance: Disney’s shares fell 15.6% in 2021 after a strong start on hopes that higher vaccination rates would bring people back to its theme parks.

The shares peaked at $203 in the fall and then slid with a big drop in November after the latest quarter missed analysts estimates for revenue and profit.

In the latest quarter earnings per share were  $0.09 compared with a big year over year loss. Revenue was 26% higher at $18.5 billion. Operating cash flows coming in at $2.6 billion was up up 58%.

Discussion  & Outlook:  The big story for Disney has been the huge success of Disney+, a streaming service it launched just before the pandemic began. It signed up 10 US million customers on launch day in November, 2019. Six month later with a global rollout it had 50 million customers, which has since more than doubled.

That phenomenal success carried the shares, but signs that growth is slowing has made investors wary at a time when themes park revenues are still weak.  Disney is spending $33 billion on new content this year, up $8 billion from a year ago. The increase is driven by streaming initiatives at Disney+, Hulu and ESPN. It also plans to release 50 feature films in 2022.

The big expectation is a rebound in its theme park business which normally produces about a third of revenues. Theme park revenue in its latest period of  $5.45 billion was 99% higher year over year.  

There is no indication when the dividend will be restored.

Disney’s longer-term picture is bright. It has wweathered the worst of the pandemic and has positioned itself hrough investment to maintain its leading position providing family-friendly fare.  As with CAE, recovery from the coronavirus will take time and patience.

This is an edited version of article that appeared in the Internet Wealth Builder on Jan. 10, 2022.  For information on how to reprint this article please view this page.

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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