Air Canada stock is my top pick, this fund manager says

Air Canada (Air Canada Stock Quote, Chart, News TSX:AC) has been lauded for its success in transforming from a debt-laden operation into a well-oiled, money-making machine.

But there’s more where that came from, says David Burrows of Barometer Capital Management, who thinks investing in Canada’s largest airline is less risky than you might think.

After a year of being stuck in the clouds in 2018, Air Canada has been flying high this year, almost doubling in value since the start of 2019. The airline began the year with lots of optimism after spending years upgrading its fleet of planes and expanding its reach with additional domestic and international routes, a $12-billion investment, according to management, which is now paying off.

Once drowning in debt — Air Canada filed for bankruptcy protection back in 2003 — investors fled the name and took the share price below the $1.00 level. Now, history is rewarding the believers as AC looks ready to break through the $50.00 per share mark.

The best part of this scenario? In an industry constantly impacted by externalities (the price of oil, labour issues and the general state of the economy), Air Canada is looking like a safe bet thanks to its growth prospects, according to Burrows, who spoke with BNN Bloomberg on Wednesday and made AC one of his Top Picks.

“Air Canada has really gone through a metamorphosis. They have been paying down debt substantially, they’ve replaced all of the planes and they have a bunch of new routes coming on,” says Burrows, president and chief investment strategist at Barometer Capital.

“If you look at it today, it trades at a significant discount to the airline sector, but it has been significantly de-risked, so new revenue growth comes at a much lower level of risk,” he said. “You’re got growth and probably an earnings multiple that will expand, and people will pay a higher multiple of earnings because it’s becoming less risky.”

Air Canada reported its third quarter earnings last month, showing operating revenues of $5.553 billion, a three-per-cent drop year-over-year, and net income of $636 million, down nine per cent. Adjusted earnings climbed to $2.27 per share, up from $2.10 per share a year ago but still below analysts’ consensus of $2.34 per share.

On the quarter, management said that the worldwide grounding of Boeing Max 737 aircraft has impacted AC’s bottom line, as the company had made a large investment in the new plane.

“The removal of 36 737 Max aircraft, or about 24 per cent of our narrow-body fleet, from our schedule during our peak summer season exacted a toll,” said CEO Calin Rovinescu in a press release.

Overall, Burrows says that Air Canada is a well-positioned name in the sector.

“If you think that the economy is okay — and we think that the consumer is in great shape — the last piece is taking over Aeroplan, that’s going to add a bunch to their cash flow, and they think that they can expand the size of that loyalty program significantly over the next three years, so that adds another step of growth,” says Burrows.

“The stock is behaving extremely well. We’ve owned it for a long time, but I’d continue to buy it here,” he says.