AIR CANADA’S STOCK STILL UNDERVALUED,
Cost reductions rising loonie, give it a lift
With shares soaring more than 50 per cent this year and record second- quarter profits that smashed already elevated expectations, analysts say Air Canada is still “undervalued” and have upgraded the airline’s stock.
Thanks to increased passenger traffic and l ower operating costs, Air Canada reported an adjusted net income on Tuesday of $215 million, or 78 cents per share, almost double the already- elevated average analyst consensus calculated by Bloomberg of 38 cents.
The stock soared Tuesday, increasing 9.6 per cent to $ 21.74, Air Canada’s highest closing price in 11 years. It dipped 3.96 per cent Wednesday to $ 20.88, but the airline’s share price has increased 52.7 per cent since the beginning of the year.
The company’s robust profits and positive results prompted several analysts to upgrade Air Canada’s target price.
“Despite the significant improvements at Air Canada, there remains a tendency to discount these results,” wrote CIBC analyst Kevin Chiang in a note to clients Wednesday, boosting Air Canada’s target price from $23 to $27.
Chiang wrote that Air Canada has not been impaired by its significant capacity growth, and that its restructuring has, in fact, driven improved profitability while being capable of dealing with external factors, such as rising jet fuel costs.
“With Air Canada showing it can grow earnings despite higher fuel costs, line of sight to investment grade debt and a number of positive earnings catalysts, we continue to see it as significantly undervalued,” he wrote.
Air Canada l aunched 16 i nternational and US transborder routes during the second fiscal quarter, said chief executive Calin Rovinescu on a conference call with analysts Tuesday, and has continued to increase the number of international connecting passengers coming through Canada.
However, capacity growth is expected to slow in 2018 as the company shifts its focus from wide- body growth to mainline narrow- body fleet replacement.
Despite Air Canada’s strong results, Robert Kokonis, president of Torontobased aviation consulting firm AirTrav Inc., said some investors may have lingering concerns about the longterm sustainability of the airline’s business strategy.
“For so many years, Air Canada j ust starts to do well and then something comes along and mucks it up, whether it’s strategy or something economic, and I think that’s where some of the concern may be coming from,” Kokonis said.
“I suspect it may take another year or two for the streets or investors to say Air Canada has sustainably turned the corner with this business plan.”
RBC Capital Markets analyst Walter Spracklin was also among the many who raised Air Canada’s target price, from $ 25 to $ 26, citing a strong quarter and expected meaningful debt reduction as free cash flow grows.
“We are just at the beginning of this trend, with the full effect expected in 2022,” Spracklin wrote in a note to clients.
“As we see line of sight toward major debt reduction if our free cash flow forecasts are accurate, we believe there will be a positive re- rating of Air Canada shares, which we see as still undervalued.
“Air Canada remains our single best idea in transportation today and we reiterate our top pick rating.”
Air Canada will be hosting an investor day in September, where the company says it will provide more information about its growth strategy moving forward.
The next question for investors, AltaCorp analyst Chris Murray wrote in a note to clients, is how financial performance will continue to improve.
Murray also upgraded Air Canada’s target price from $27 to $30.
“We see a number of avenues, including a revised loyalty program, the impact of new computer systems, the next step in ( Capacity Purchase Agreements) with regional carriers and the cost reduction offered by the new narrow- body fleet as being part of but not the end of the discussion,” Murray said.
Some analysts, however, remain unconvinced that the Canadian airlines will catch up to the performance of their U. S. counterparts. Air Canada l ags behind American airlines when i t comes to its price- t oearning ratio, according to Bloomberg.
“While the market may be looking through a different lens today, not that much has changed f rom our perspective,” wrote Raymond James analyst Ben Cherniavsky in a note to clients.
“The economy appears a little healthier and the Canadian dollar is higher, which helps reduce airline costs; however, Canada’s airlines continue to underperform their U.S. peers by all the key financial measures. This, in our view, reflects the excess capacity growth and insufficient pricing power in the market.”
WE BELIEVE THERE WILL BE A POSITIVE RE-RATING OF AIR CANADA SHARES.