Air Canada is cheap compared to its American peers, says Paradigm Capital

A bullish outlook from Air Canada (Air Canada Stock Quote, Chart, News: TSX:AC) has garnered a price target raise from Paradigm Capital analyst Corey Hammill.

On Thursday, Air Canada reported that it had set a record for passengers carried over the recent Canada Day holiday, and provided an outlook on its upcoming second quarter results.

“Our record for passengers carried caps an excellent second quarter, during which our EBITDAR, driven by higher revenue and lower than projected fuel costs, is expected to significantly exceed the current average analyst consensus estimate of approximately $475-million,” said CEO Calin Rovinescu. “I thank our customers for their loyalty in choosing Air Canada and our 30,000 employees for their hard work and dedication in welcoming and transporting them safely.”

Hammill says low fuel price and a solid pricing environment are providing a tailwind to Air Canada’s business.

“This was a very bullish statement from Air Canada,” the analyst says. “We have been focused on improving unit revenue trends (RASM) and have been noting the decline in CAD jet fuel prices. The combination of these factors, along with record passenger demand, continues to drive AC’s strong profitability. AC is the least expensive North American airline, trading at ~3.9x EBITDAR while its U.S. legacy peers are trading at ~5.6x. If AC traded in line with its U.S. comparables, the share price would be $34.00+, almost double the current ~$19.20. Technical analysis supports XAL airline index uptrend. We also remind investors that AC shares are very sensitive to multiple expansion. Recall that a 1-multiple-point expansion is worth ~$10.00/share in incremental value for AC, meaning that using a U.S. legacy carrier average 6x multiple could translate into a $30.00+ share price.”

In a research update to clients today, Hammill maintained his “Buy” rating on Air Canada, but raised his one-year price target on the stock from $18.00 to $21.00, implying a return of 13 per cent at the time of publication, including dividend.

Hammill thinks Air Canada will generate EBITDAR (the R stands for restructuring or rent costs) of $2.7-billion on revenue of $15.96-billion in fiscal 2017. He expects those numbers will improve to EBITDAR of $3.2-billion on a topline of $17.2-billion the following year.