Air Canada’s stock could be due for a correction, this fund manager says

Air Canada (Air Canada Stock Quote, Chart TSX:AC) is flying high these days after a sparkling quarterly report earlier this week which boosted its share price to record levels. The success stems from seeing a company executing according to plan, says James Telfser of Aventine Asset Management, who argues that even though AC still trades at a discount to its airline peers, the stock has gotten a little rich.

Air Canada reported its first quarter financials on Monday, coming in with operating revenue of $4.453 billion, which was better than the $4.071 billion in Q1 of 2018 and higher than analysts’ consensus estimate of $4.39 billion, to go along with adjusted earnings of $17 million or $0.06 per share, also better than the loss of $26 million or $0.10 a year prior and higher than the street’s forecast of negative $0.18 per share.

CEO Calin Rovinescu praised his company’s ability to perform over the quarter despite headwinds that included the grounding of its 24 Boeing 737 Max 8’s, which forced the airline to cut flights and to lease other aircraft.

“I am pleased to report excellent first quarter results for Air Canada, despite several challenges in the quarter,” said Rovinescu, in a press release. “Contributing to our performance was the completion of two key strategic initiatives early in the quarter with better than expected results — our acquisition of the Aeroplan loyalty program and our conclusion of a new capacity purchase agreement with Chorus Aviation for flying by Jazz. We are further encouraged by strong booking trends entering the busy summer peak.”

Telfser says the stock’s rise —AC is up 37 per cent year-to-date and up more than 150 per cent over the past 24 months— comes down to management’s ability to carry out its vision.

“It shows that they’re executing very, very well,” says Telfser, managing partner and portfolio manager at Aventine, to BNN Bloomberg on Tuesday. “When a management lays out a plan and says, ‘This is what we’re going to do’ —and they’ve done this over the last number of years— and then they execute on all of those things, it just bodes really well for the share price.”

Telfser says AC still trades at a discount to its American peers, a positive indicator for the stock.

“The multiple is still extremely cheap at 3x [forward earnings] where its peers in the US are a 6x. They’ve been talking about closing that gap for a long period of time and for whatever reason they just can’t seem to get that going. But putting up strong quarters like this one will help close that valuation gap,” he says.

“That valuation gap, we call it the holy grail of investing,” says Telfser. “When you have a stock that’s trading at 52-week highs but it’s still trading at a depressed multiple, that value and momentum blend can be really powerful, and that’s what you’re seeing with this stock.”

“But people tend to get a bit ahead of themselves and we’re betting that that’s actually happening here,” he says.