Air Canada is still a risky investment, Bruce Campbell says

The holiday travel season may have drawn to a close but with the price of oil dropping over the past few months, investors may be tempted to take a ride on Air Canada (Air Canada Stock Quote, Chart TSX:AC). Be careful, says portfolio manager Bruce Campbell, who says he doesn’t like how tightly the company’s fortunes are tied to oil.

“There are two cost inputs, oil and labour, and they can control labour but they can’t control the price of oil,” says Campbell, president of Campbell Lee & Ross, to BNN Bloomberg recently. “They can hedge a little bit but they tend not to be particularly great at it over long periods of time.”

“The stock is statistically cheap but it’s always statistically cheap and it’s for the reason that they don’t control those things,” he says. “It’s not for me.”

Air Canada mounted an impressive turnaround over the past half-decade, expanding its global business and launching ultra low-cost airline Rouge. And the results are reflected in the company’s share price which ballooned from $2.00 in 2013 to a high of $28.70 by October of 2017. Last year proved to be a bit of a wash, however, as the stock finished up right where it started in the $25 range. The stock just got a boost at the end of December when news arrived that Air Canada’s acquisition of the Aeroplan loyalty program from Aimia Inc for $450 million had cleared regulatory hurdles. Aimia shareholders are to vote on the deal on January 8.

Air Canada’s last quarterly report came at the end of October, when the company posted third quarter net income of $645 million, a 63 per cent year-over-year decline, coupled with a record top line of $5.415 billion. The drop in profit was attributed to rising fuel costs as the price of oil continued to climb throughout the first half of 2018. Competitor airline WestJet also posted a significant drop in profit in its last quarter, also delivered at the end of October.

At the same time, Campbell says that there may be more upside to come for AC.

“You could probably trade it and make some money if you’re so inclined and you’ve been able to do that over time —but you’ve also lost your shirt a few times too,” says Campbell. “Oil prices are low now so there are probably a good couple of quarters of earnings coming. If I owned it, I’d take that opportunity to sell when you get to the high $20s or $30 and I’d say thank you and see you later and wait for the next time it goes back to $20.”