Air Canada has target lowered by TD

After fourth quarter earnings from Air Canada (Air Canada Stock Quote, Charts, News, Analysts, Financials TSX:AC) last week, TD Securities analyst Tim James is sticking with a “Buy” rating on the stock while dropping his target from $28 to $26 per share in a Tuesday note to clients. James said the future still looks bright for the Canadian airline despite some turbulence over the short term.

Air Canada reported record operating revenues of $4.680 billion, up a full 71 per cent from a year earlier, in its fourth quarter 2022 financials, delivered on February 17. The company posted an adjusted net loss of $0.61 per share and positive adjusted EBITDA of $389 million for a margin of 8.3 per cent. Analysts were expecting operating revenue of $4.4 billion and a loss of $0.21 per share.

The company said strong passenger demand was a factor in the better-than-expected numbers and that the Q4 benefitted from a more diversified revenue stream, where its loyalty program, Cargo and Vacations businesses provided contributions.

“We are pleased with our fourth quarter and full year 2022 financial results. We reported record fourth quarter passenger and operating revenues, surpassing our results from a year ago and those of the fourth quarter of 2019. This was due to solid demand and yield environments across our network,” said Michael Rousseau, President and CEO, in a press release.

For the full year, AC managed $16.556 billion in operating revenues, up by 2.5x over its 2021 numbers and reaching about 87 per cent of 2019’s operating revenues. On adjusted EBITDA, 2022 came in at $1.567 billion compared to negative $1.464 billion for 2021.

Looking ahead, management said its 2023 operating capacity, as measured by Available Seat Miles (ASM) should increase by about 24 per cent compared to 2022’s levels, translating to about 90 per cent of 2019’s pre-pandemic ASM. For 2024, the company predicts it’ll be back to about 100 per cent of 2019’s numbers. On earnings, management guided for $2.5-$3.0 billion in adjusted EBITDA for 2023 and about $3.5-$4.0 billion for 2024.

For his part, James said his lowered target stems from the carry-forward of a portion of the weaker-than-expected Q4/22 results, along with consideration of the 2024 guidance as well as other minor modelling updates.

“Air Canada is trading at an attractive valuation, when considering its earnings potential in 2024 and beyond,” James said in his Tuesday report. “Based on our current assumptions, we believe that Air Canada’s aircraft deliveries, capacity plans, and pricing power will allow it to navigate short-term headwinds and reward investors who ride out the current volatility.”

At press time, James’ one-year target of $26 represented a projected return of 22.6 per cent.