Air Canada is built to last, Paradigm Capital says

There may be some turbulence ahead for Air Canada (Air Canada Stock Quote, Chart, News TSX:AC) but the company’s long-term prospects look excellent, says Paradigm Capital analyst Corey Hammill, who reviewed AC’s latest quarterly results in an update to clients on Tuesday.

Air Canada reported its fourth quarter and full year 2019 results on Tuesday, posting revenue for the Q4 of $4.429 billion, up from $4.227 billion a year earlier, and EBITDA of $725 million (excluding about $60 million in one-time expenses), also up from $619 million a year earlier.

In a tumultuous year featuring the grounding of AC’s (and everybody else’s) fleet of Boeing 737 Max 8’s, the company nonetheless saw revenue grow 6.1 per cent to $19.131 billion, while EBITDA for 2019 was up 13.2 per cent to $3.636 billion.

On the quarter and year, President and CEO Calin Rovinescu said Air Canada showed its ability to overcome major challenges, with about 25 per cent of its narrow-body planes down for most of the year following the Max 8 grounding worldwide.

“The agility and consistency that we displayed in 2019 gives me confidence that we will successfully execute on the several key opportunities now before us. This includes the launch of our new loyalty program later this year, which we expect will be the best airline loyalty program in the world,” Rovinescu said in a press release.

Hammill rated the quarter as coming in-line with estimates, with earnings being helped by an 11 per cent decline in fuel costs. AC’s $4.429 billion top line was a little shy of Hammill’s $4.500 billion estimate and the consensus $4.516 billion and Q4 EBITDA of $725 million was ahead of the analyst’s $692 million estimate and the Street’s $707 million.

Hammill said that the ongoing 737 Max 8 issue along with the impact of the COVID-19 virus crisis on global travel, Air Canada’s near term outlook is uncertain, a state of affairs reflected in management’s guidance which projects first quarter 2020 EBITDA to be down about $200 million year-over-year, which in the end could have about a $3.00 negative impact on the share price, said Hammill.

“Despite current headwinds, we remain upbeat on our outlook for AC and believe that a longer-term multiple expansion is more than overdue,” Hammill wrote.

“Air Canada’s business is built to withstand shocks and still deliver strong profits, as clearly evidenced in 2019, and we expect more of the same in 2020. Shares have reflected recent performance, ranking among the top TSX performers over the past decade and one of the top airline stocks in 2019, up +80 per cent. AC continues to chip away at the valuation spread compared to US legacy carriers now down to ~1.5 multiple points, with AC trading at ~3.9x and U.S. peers at ~5.4x 2020e EBITDA. We estimate
each multiple point is worth ~$15.00 per AC share,” he wrote.

With the current uncertainty, Hammill is maintaining both his “Buy” recommendation and $54.00 price target, which at press time reflected a potential return including dividend of 14 per cent.