Shares of CAE Inc. experienced their most significant decline in over three years after the flight simulator company announced a strategy to boost operating income by 30 percent or more by 2030, with a heightened emphasis on defence clients.
The Montreal-based firm aims to achieve as much as $1 billion in adjusted operating profit by that year, up from the current range of $700 million to $750 million, Chief Executive Officer Matthew Bromberg stated in an interview on Thursday.
"Organic growth will drive roughly half of it. The other half can be driven by the transformation activities," Bromberg said. The transformation strategy is expected to generate annual run-rate savings of between $125 million and $150 million.
Investors reacted negatively, with CAE's stock price dropping as much as 13 percent in Toronto on Friday, the steepest fall since August 2022. The stock later pared some losses, trading down 12 percent to $32.30 as of 12:19 p.m.
"The longer-term outlook surprised, skewing more conservative and largely hinging on run-rate cost savings with more limited contribution from organic growth," Bank of Montreal analyst Fadi Chamoun wrote in a client note.
CAE reported revenue of $1.3 billion for the fiscal third quarter ended March 31, slightly below analysts' estimates. Adjusted earnings per share of 42 cents matched forecasts but were down 11 percent from the same period last year. The quarter was impacted by disruptions from the Middle East conflict, which affected bookings and sales.
For fiscal 2027, CAE expects revenue to increase by a low-single-digit rate, with civil aviation flat to slightly down and defence potentially growing by mid-single digits.
CEO Bromberg, who joined CAE from Northrop Grumman Corp. in August, has already implemented a two percent reduction in the global workforce and phased out some commercial airline simulators to cut costs. Last week, the company announced it was exploring options, including a sale, for its aviation operations software Flightscape, the largest non-core business.
CAE is also planning investments to improve manufacturing productivity and potential acquisitions in core markets or share buybacks. "Our performance has been sporadic or spotty, and we want to be more consistent," Bromberg said. "We want to grow our top line, we want to grow our margins, and we want to improve free cash flow."
Macroeconomic uncertainty and reduced aircraft deliveries due to supply-chain constraints have pressured the global aviation industry, leading to lower pilot hiring and weighing on CAE's civil aviation business. Meanwhile, geopolitical instability and NATO allies' commitment to spend five percent of their GDP on defence are creating opportunities for CAE's defence business beyond cockpit training.
"We're exiting certain lines of business, or deemphasizing, as we try to go to higher-margin contracts," Bromberg said. "We have a tremendous market opening up on us."
The defence unit currently represents about 45 percent of CAE's revenues but has the potential to grow faster than civil aviation, Bromberg added. The firm is considering expanding into training and simulation for airborne surveillance, submarines, and land vehicles.
