Air Canada’s stock is being unfairly penalized, even though it contains great value, particularly with the country’s immigration policy as a tailwind, says an air transport sector analyst who works at a large Canadian bank.
At a time when the stock is hovering around $17 on the stock market, Kevin Chiang of CIBC highlights in a report published this week the extent to which sentiment in the financial markets has become negative towards the Montreal air carrier.
Although he recognizes the fears surrounding the “health” of the Canadian consumer and the fact that negotiations with pilots are weighing on the stock, Kevin Chiang highlights several elements in an attempt to demonstrate how far Air Canada’s stock has fallen. unjustifiably disgraced to the point of no longer being popular with investors.
Air Canada’s current stock price is pricing in a “hard landing,” according to Kevin Chiang, which is contrary to popular opinion, he says.
He says other stocks in his coverage universe are getting the benefit of the doubt and banking on a “soft landing.”
Air Canada is, according to him, in a better position to limit the impacts of a slowdown than it was at the start of the 2008-2009 financial crisis.
Aeroplan continues to be a growth engine in its eyes. “Aeroplan is a less cyclical source of revenue. This loyalty program purchased in 2019 reached its goal of 7 million members ahead of schedule. Membership in the program creates a more loyal customer base. »
Forecasts for growth in the Canadian population, attributable in particular to strong immigration, constitute a significant tailwind for air transport, he emphasizes.
He also notes that the profits generated by Air Canada are better and that the debt level is back to pre-pandemic levels, while the value of the company remains depreciated.
“The market is not giving Air Canada credit for its turnaround,” he says.
Air Canada has, according to him, a certain number of levers to manage a potential slowdown.
Kevin Chiang appreciates the benefits Air Canada enjoys by being part of the Star Alliance network of 26 airlines. “Through its global network, Air Canada has the ability to optimize its routes and move its assets where demand is greatest. »
The analyst says he hears questions about short-term spending. “While there is apprehension that Air Canada is investing in its fleet at a time of concern for the health of the Canadian consumer, it should be noted that these aircraft are primarily intended for replacement, so the net capacity growth is not that significant. Additionally, history has shown that airlines have some flexibility in their capital expenditures if they need to adjust course. »
In total, 15 of the 17 analysts interested in Air Canada stock are currently suggesting Buy. These experts’ average target price over a 12-month horizon is $26.85, the equivalent of approximately 50% appreciation from the current price.
Kevin Chiang is not the most optimistic on Bay Street. Several of his peers have targets at $32 and $33 while his is at $28.
RBC analyst James McGarragle is one of two analysts not to recommend buying the stock. The caution of this transport specialist is notably linked to the increase in operating costs and the higher level of debt of Canadian consumers.
“I expect higher interest rates to weigh on discretionary spending in the country as the ratio of household debt payments to disposable income hits a record high,” he points out in a note published in the spring.
While he believes the situation will affect demand for travel in addition to having a negative impact on the price of plane tickets, he anticipates a respite when interest rates fall sufficiently.
Air Canada shares closed Thursday’s session up 2% at $17.89 in Toronto, not far from its 52-week low of $16. The stock was worth more than $50 in 2020 before the pandemic paralyzed part of the economy.
