Air Canada stock is a good bet right now, Colin Stewart says

These days, the clash between WestJet (TSX:WJA) and Air Canada (Quote, Chart TSX:AC) is looking like the mirror image of its past incarnation: whereas Air Canada used to be the one struggling while WestJet was flying high, now the tables have turned. Chalk it up to smart moves by management and a measured approach to adding capacity, says Colin Stewart of JC Clark Limited, who says that AC’s stock is now cheap compared to its airline peers.

Air Canada’s stock went on a tear between early 2016 and late 2017 where it rose from the $7.00 range to $27.00 over roughly an 18-month span. So far, 2019 has been a wash, with AC’s share price starting at $25.90 and after some ups and downs currently trades in the high $26.00 range.

But that compares well to WestJet, which is now down 25 per cent over the past 12 months. And whereas WestJet has been making headlines with its union woes and the scaling back of its services, Air Canada seems to be hitting all the right notes, having recently earned praise for its purchase of the Aeroplan loyalty program from Aimia Inc. for $450 million.

“On Air Canada, I think they’re taking share from WestJet and generating a lot of free cash flow,” says Stewart, in conversation with BNN Bloomberg. “Excellent management, they’ve most recently repurchased the Aeroplan rewards business, which they had once owned and spun out from Air Canada, the stock went down a lot and they’ve bought that business back at a big discount.”

Air Canada reported its second quarter earnings at the end of July, posting a 10.4 per cent year-over-year increase in revenue at $4.33 billion, while its adjusted earnings of $114 million or 41 cents per share for the quarter were about half that of Q2/17, even as they beat the consensus estimate on earnings.

“We like Air Canada,” says Stewart. “I think the airline industry has gone through a bit of a renaissance where these companies —certainly, in North America if you look at Air Canada, WestJet and then the US operators— they’ve become much more efficient, load factors are high, planes are generally full, for anyone who’s been in one recently.”

“I think the industry has been a little more disciplined about adding capacity and being somewhat cautious of adding too much capacity as they’ve often done in the past,” he says.

Last month, WestJet announced it would be trimming back its flights across Canada, part of a plan to cut about $200 million from the company’s costs by 2020. The company said that it had anticipated stronger demand from recently expanded routes than effectively materialized.

Both airlines are making attempts at the ultra-low-cost carrier (ULCC) sector, with Air Canada expanding its Rouge discount brand of domestic flights while this summer WestJet launched Swoop with flights between a few select Canadian cities.

“The airline stocks have always been cheap but Air Canada does still trade at a decent-sized discount to its US peers, so I think for that reason, the outlook is positive,” says Stewart. “I would recommend owning it.”