It could be a long time before the airlines recover but now’s the time to be thinking about Air Canada (Air Canada Stock Quote, Chart, News TSX:AC), says portfolio manager Teal Linde of the Linde Equity Fund, who thinks over a three-year horizon AC looks great.
It’s been a disaster of a first half for the airlines which have seen air travel decimated by the COVID-19 pandemic as countries have closed borders and customers have ditched their travel plans under stay-at-home restrictions.
But even with the easing of rules across Canada, the rebound in air travel looks still far away.
Canadian Prime Minister Justin Trudeau responded on Monday to a recent volley from Air Canada’s CEO and a group of tourism industry leaders calling for an easing of travel restrictions, with the PM saying Canada won’t be opening up its borders anytime soon, arguing that a slow-mode approach is needed to cut down on risks associated with a potential second wave of the coronavirus.
“I think you just have to be patient with this one…”
“I understand how difficult this is and how frustrating this is for some people but … we are going to be very very careful about when and how we start reopening international borders,” said Trudeau.
And while putting a pall over near-term expectations won’t make Air Canada shareholders that happy, Linde says investors need to keep their eyes on AC’s longer-term prospects.
“We own it and we bought at around $18,” said Linde, speaking on BNN Bloomberg on Monday. “I think the way to look at Air Canada —and for this is for most stocks— is to look at a three-year time horizon, which is typically what we look for as a time horizon for any stock we buy, three years or more.”
“Three years actually works well for Air Canada because management of Air Canada believes that they’ll be back to normal business by 2023. That might be a long time to wait but if the stock goes from where it is today to let’s say $40, that’s a double in three years and if you annualize that return it works out to about a 27 per cent compound return, which is a fantastic return for new money investment,” says Linde.
Linde says even within the airline industry, AC is better prepared to weather the storm than most, pointing to a JP Morgan report earlier this year that showed Air Canada as having the highest liquidity ratio score among all major airlines.
Air Canada also just completed a financing round generating up to $1.23 billion in additional capital, while since the start of the COVID-19 pandemic in Q1 of this year, the company has altogether raised $5.5 billion of liquidity.
“Air Canada is probably going to appreciate in two phases,” Linde said. “The first phase will be when investors start to be comfortable with this balance sheet, and their balance sheet is probably one of the strongest of the North American airlines.”
“Then the second phase is when people become more convinced that air travel is on its way to a full recovery,” Linde said. “We’re not there yet, but if it takes three years for this stock to get back up to $40, that’s going to be a great return.”
“I think you just have to be patient with this one,” he said.