Air Canada (AC.TO)

It is cyclical and so on, but operationally, what they have done with restructuring! The valuation gap to US airlines has narrowed a bit. Their expansion into Europe has been strong. It is a risky sector, but operationally they have done such a good job that other players have been the losers. It is a story that has been more about the operation.

(A Top Pick Oct 22/15. Up 7.41%.) Sold his holdings. There are still headwinds on the weakness of Western Canada, and the lingering fear of overcapacity.

He tends to be leery of airlines in general. Has a Long position in this, but it is a hedge position. This is trading at very cheap valuations, at less than 2X PE, because it has a lot of debt. It has the most debt of any airline in North America. It should trade at a premium to Westjet (WJA-T) where the fundamentals are very poor.

Management has done a phenomenal job, not only by putting new employees on the DC plan, they are seeing a pension surplus, and are now going to be generating free cash flow as their CapX is starting to fall after renewing their fleet with 787s, 737 Max’s. Low costs and are cutting their costs by 21%. Taking advantage of the international route rights that they used to have. Ridiculously cheap at 3X earnings.

He is a frequent flyer, and every flight he is on seems to have been full for the last 2 years. Airline stocks have had a rocky history. Because barriers to entry in the industry are relatively low, there are a lot of discount carriers coming in at about the time Air Canada starts to make good money, and cutting fares which makes them cut their fares.

Looking at earnings and occupancy factors, they are doing very well. There are consistent concerns about the airline sector. They did very well with low oil prices, which seemed to be stabilizing and may be coming back up. Thinks this will continue to be trading at depressed multiples, but the company is executing very well given what they have.

A well-run airline, and is treated with kid gloves by the Canadian government. It seems cheap, but their revenue can change so quickly. This is a difficult time to buy this. He would be a little cautious, because demand for travel isn’t particularly robust.

(Market Call Minute.) Very cyclical. She doesn’t usually buy airline stocks, and would prefer buying into something that supplies into the airline sector.

This has always been a leveraged play. On one hand, fuel is probably their 2^nd largest input cost. You would think that with fuel prices dropping it would be good for them. It is good globally for airlines, but with fuel prices dropping, that means the price of oil is dropping which is bad for Canada. The company has been fighting fuel prices over the last 18-24 months. They are going to get through it. Have reported quarter after quarter of very good numbers. They have begun deleveraging and have improved their fleet significantly. Where people are concerned is cyclicality. Are we hitting the peak of the cycle? The name is not in favour right now.

He will never again own airline stocks. They are too volatile. At the end of the day an airline seat is a commodity, but it expires the moment the plane takes off. He is not tempted.

Chart shows this has been forming a nice little upward trend, but has actually been slightly underperforming the market. If this moves above its trading range, you can expect an upside move in the stock. However, wait until you see technical evidence for the stock to at least outperform the Canadian market. So far we haven’t seen that yet. As you get into October, and into the Christmas buying season, that will probably be the opportunity to Buy.

(Market Call Minute.) He would avoid this.

He does not invest in airlines because airline stocks are trades. They are getting hurt by what is happening in Europe. People won’t travel there.

Airline stocks are very difficult to pick at the right time. All these stocks look extremely cheap, and this one looks very cheap relative to the US comparables. A very competitive market. Even though it looks very tempting at this low multiple, he is surprised that it hasn’t moved up with the other airline stocks in the US. Finds it very difficult to buy these things for the long-term.

Trading at 3X earnings, because earnings have done relatively well recently. He doesn’t like investing in airline stocks, which are capital intensive, highly unionized and very cyclical. This has just gone through a great positive cycle where earnings have gone up. You want to look at these when they aren’t earning very much and have been in a downtrend.