Investors looking for more upside this year from Chorus Aviation (Chorus Aviation Stock Quote, Chart, News TSX:CHR) may be disappointed, says money manager Bruce Murray, who argues that with the company in the first innings of a strategic shift, it may take a while for them to work out the kinks.
What a difference a year makes. Late in 2018, with its share price dropping like a knife and worries about the company’s future very much in the air, shareholders had reason enough to question the soundness of their investment.
But come January, the skies certainly cleared for Chorus, notably due to locking up a long-term purchase agreement with Air Canada, one that extended for another ten years Chorus’ subsidiary Jazz Aviation’s regional service with Air Canada until 2035.
The deal was a load off for Chorus, which was staring at a contract expiry date of 2025.
“There has been some concern about where does Jazz sit in Air Canada’s plans and how long is this relationship going to last,” said Chorus CEO Joe Randell said on a conference call with investors in January. “This really puts those concerns to bed.”
With the news —and with a labour agreement with Jazz pilots later in January— the stock jumped and kept climbing, venturing from the mid-$5.00 range at the start of the year to the mid-$7.00 range where it has been hanging out ever since.
Investors may be thinking that there’s more in the tank, given that CHR was all but touching $10.00 as recent ago as December 2017/January 2018. But while upside is likely to come, it may not be the quick growth you’d expect, says Murray, CEO and CIO of the Murray Wealth Group, in conversation with BNN Bloomberg on Monday.
“We’ve owned Chorus Aviation and we’ve owned it for some time and we saw this recovery in the stock coming. But Chorus is shifting their business,” Murray said.
“Historically, they got a fixed fee from Air Canada, so that was good. That fixed fee drops in a couple of years and they’re hoping to make it up by the leasing of aircraft, which is a new business they’re entering. They’ve got plans to sort of flatten that but there is some danger that they’re not going to be able to make that up, and the earnings could drop in 2021 as a result of this contract,” he said.
The Air Canada agreement will see $940 million in incremental contracted revenue for Chorus over the next 17 years for a total of $2.5 billion. Chorus has said that proceeds from the deal will allow it not only to continue generating cash flow to support its healthy dividend but also to help fund its leasing business, including the purchase of new aircraft.
Murray says that patience and judicious profit-taking might be in order for CHR shareholders.
“My advice is to be cautious when you buy it,” he says. “Buy it on weakness and don’t get too excited about it. When it gets up above $8.50 – $9.00, sell a little bit of it. I believe that it’s going to work but it never hurts to take a little bit of profit when prices are up.”