BofA downgraded shares of CAE, Inc. (NYSE:CAE) to Underperform from Neutral, lowering the price target to $26 from $37 per share.
Analysts said in a note that the downgrade reflects lower for longer Defense margins and concerns around overcapacity impacting margins at Civil.
"We lower our FY2024 FCF expectations to $211mn from $283mn. Our PO is based on a relative 1.4x P/FCF (vs. prior 1.5x) multiple on CY24E estimates," explained the analysts.
"In our view, the 1.4x relative multiple, about half std deviation above historical, fairly factors in the scarcity premium for a pure play on aircraft simulators, new defense wins, and the concerns over defense underperforming for longer and risk of not executing on Civil."
The analysts also noted that while new margin accretive contracts make up ~20% of CAE’s backlog, the new awards are only ~3% of revenue. In addition, given the U.S. is increasing its focus on spending in response to active global threats, they anticipate incremental training funding will be a lower priority.