Opinions
The Monthly Gems by Allan Tong
Air Canada
AC-T
TOP PICK
Jul 06, 2022
Stock price when the opinion was issued
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It is trading near the levels seen at the early stages of the pandemic. Trade war fears have dragged down the airlines but this is overdone. Air Canada is at an 80% booking level which is normal. Its flights to the U.S. are down but international business is strong. It makes more money on international flights than domestic. The price is still OK. Buy 14 Hold 2 Sell 1
(Analysts’ price target is $23.09)
Premium contentPremium contentWe reiterate AC as a TOP PICK. The company is adjusting to uncertainty over North America air traffic, which is a result of their well diversified route portfolio. Cash reserves continue to grow as debt is retired and shares bought back. It trades at 10x earnings, 3x book and supports a ROE of 125%. We recommend trailing up the stop (from$13.00) to $14.50, looking to achieve $24.00 -- upside potential of 20%. Yield 0%
(Analysts’ price target is $23.74)Started to put in a bit of a bottom a couple of months ago, as did many other airlines. This name's had a big move higher. There are 2 ways to consolidate: in price (sharp pullback) or in time (move sideways). Thinks we'll see consolidation at least for a bit, perhaps with a slight downward bias. (In tech analysis it's called a "flag".) Once done, it should resume the uptrend and move higher.
Once we get into August, put on the brakes or at least assess the risk.
It is a trading opportunity and not a long term hold. There is still upside and there has been insider buying. It has announced an issuer bid. 18% of shares have been bought and cancelled in a year so revenue per share is going up. It is trading at a discount to its American peers and to its historical valuation.
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Right before Canada Day last week. Air Canada announced it will cancel over 15% of its flights this summer. On July 4, it was reported that Air Canada ranked no. 1 in delays on the July 2-3 weekend as two-thirds of all its flights (717 in total) landed late. One assumes that the reason is the same that's plaguing many airlines around the world: lack of staff. However, on July 4, BNN reported that Air Canada staffing levels are at 97% of pre-pandemic levels. Blame has to be pointed at the Liberal government which still mandates the ArriveCAN app to help screen for Covid, even though Ottawa removed random Covid testing in June to ease airport congestion.