Air Canada is still an undervalued stock, this investor says

After hitting a new all-time high, Air Canada (Air Canada Stock Quote, Chart, News TSX:AC) has been flying low over the past couple of weeks. Is the dip a good buying opportunity? You bet, says James Telfser of Aventine Asset Management.

Shares of Air Canada were down this week along with the rest of the airline stocks amid concerns over the coronavirus, with China on Friday adding further travel restrictions as the number of confirmed cases rises. The stock had recently hit a high of $52.71 per share but has been dragged down almost nine per cent since.

And while investors may be cautious about jumping in on a name that has been climbing steadily for more than a year now, Telfser says to put those worries to bed.

“Talking about buying stocks at 52-week highs versus 52-week lows is something that I say a lot, and Air Canada certainly fits that bill,” said Telfser, managing partner and portfolio manager for Aventine, who spoke to BNN Bloomberg on Thursday.

“I also like companies that are trading at 52-week highs that are undervalued still. So if you look at a name like Air Canada trading at 4x EBITDA versus peers in the US at 5-6x, there’s still a huge discount that’s meaningful — a 20-per-cent valuation discount,” he said.

“And they’ve been doing all the right things. They’ve been checking all the boxes with the pension liability, with bringing down costs and streamlining their operation, bringing Aeroplan in,” Telfser added. “So, they’ve done all of these things and we’re going to see the benefits of that for years to come, I think, especially with the consumer and how much they’re flying.”

Air Canada has felt the effects of Boeing’s 737 Max affair, which has grounded planes worldwide, including 24 owned by Air Canada, which has this week announced that the 737 Max has been removed from its schedule until at least June 30. The loss of the plane from its fleet has hit AC’s quarterly numbers, where CEO Calin Rovinescu called the grounding a “serious disruption” to the company’s operations.

Air Canada’s latest results came in late October, with the company reporting a revenue drop of three per cent to $5.53 billion and adjusted earnings up to $2.27 per share from $2.10 per share a year earlier.

But the recent pullback should be taken advantage of, says Telfser, especially with a company as solid as Air Canada.

“You get these little blips on a company on something that will actually blow over and you want to buy on these kinds of events,” Telfser said. “We think that for investors if it pulls off any more than this you should add to it because it has a lot of positive characteristics.”

“When you look at momentum stocks, a lot of people are afraid when they pull off and they think that the party’s over, but the value component helps in an Air Canada,” he said. “Also, buying stocks that have good positive momentum over the last nine or 12 months, generally that stock does well over the next 12 months. It’s a good strategy.”