David Cockfield has nothing but praise for Air Canada (Air Canada Stock Quote, Chart, News TSX:AC), whose stock has performed excellently this year.
But that doesn’t mean he’s buying AC. The calculation is simple, the portfolio manager says: with the genuine threat of a worsening global economy on the horizon, investors should be staying away from the airlines.
Air Canada has gone through a dramatic turnaround over the past half-decade from being a debt-laden train wreck to the sleek, profit-making machine that it is today.
The difference is clear from the company’s share price, too, where at the nadir of its troubles, AC was going for less than a dollar whereas today the stock is up 67 per cent year-to-date and up over 230 per cent over the past three years. According to the Bloomberg World Airlines Index, Air Canada has been the best-performing airline stock so far in 2019.
But all those glowing numbers shouldn’t distract you from the fact that airlines are notoriously prone to underperform during periods of economic tightening, says Cockfield, managing director and portfolio manager for Northland Wealth Management.
“As a long-term investor, I can remember some painful periods with airlines in the past,” said Cockfield to BNN Bloomberg on Friday. “They came and went and came and went.”
“Air Canada has done an excellent job of building its client base and they’ve managed to escape some of the criticism that some of the other airlines have faced,” he says. “But it’s still an airline and the airline business is very fragile if there’s any kind of economic pullback. People just stop travelling.”
“I’d be cautious about adding to Air Canada at this particular point in time,” says Cockfield. “I’m not that positive in terms of the economic outlook in 2020. Despite the fact that the multiple is quite low —but there’s hardly any yield to the stock— I would sit on the sidelines as far as Air Canada goes.”
Air Canada last reported its quarterly earnings at the end of July where management noted that the worldwide grounding of Boeing-made 737 Max jets was affecting the company’s profit growth and driving up costs as the airline scrambled to find other planes to accommodate the grounding of its 24 737 Max planes.
AC said that its fiscal second quarter featured record operating revenues of $4.757 billion, while net income went from a loss of $129 million or $0.37 per diluted share during Q2 of 2018 to a profit of $343 million or $1.26 per diluted share this year.
“These are impressive results with revenue growth in each market segment and system passenger revenues up 10.7 per cent on capacity growth of 2.3 per cent,” said president and CEO Calin Rovinescu in the quarterly press release. “We also managed costs well, especially with the challenges of sourcing replacement flying for some of the Boeing 737 MAX aircraft that are out of service.”
Air Canada made headlines earlier this year announcing a deal to purchase vacation airline company Transat for $720 million. So far, shareholders have approved the proposed acquisition which would effectively unite Canada’s number one and number three airlines, but it won’t be until next spring before regulators reach their judgment on the deal.