Air Canada stock is a steal right now, Scotia says

With a bull market run that began last October now extending into the middle of 2024, are there any bargains left in the market?

Yes, says Scotia analyst Konark Gupta who says Air Canada (Air Canada Stock Quote, Chart, News, Analysts, Financials TSX:AC) is a solid buy right now.

As reported by the Globe and Mail March 28, Gupta had many nice things to say about AC, yet the analyst cut his price target on the stock from $30.00 to $29.00, and maintained his “Sector Perform” rating on the stock.

Gupta alluded that near term pressures might be influencing his target and rating.

“We view Air Canada as our top contrarian pick as earnings, cash flows and leverage ratio are either marching toward or exceeding pre-pandemic levels, while valuation remains highly attractive relative to history and peers,” he added. “The airline is finally catching up with its U.S. peers after a slower recovery from the pandemic due to Canada’s delayed reopening. While inflationary factors are weighing on margins in the near term, air travel demand remains strong and yields are holding up at elevated levels.”

The analyst said there is real value in Air Canada stock.

“Valuation is at all-time lows, with a wider-than-historical discount to U.S. comps,” Gupta wrote. “It can be argued that AC deserves to trade in line, considering it has a stronger balance sheet than most peers, has closed the EBITDAR margin gap (in fact now ahead), has significantly grown the loyalty program since re-acquiring in 2019, and had resolved its unique labour and pension issues by 2014. However, we think some discount is still warranted given investors are sensitive about the three C’s – cost, capex and competition – amid macro risks. While competition is becoming less noisy with the recent shut down of Lynx Air and issues at Flair Airlines, cost and capex are still concerning for some. Thus, the renewal of pilot contract and any disclosures on capex offsets should be catalysts for re-rating over the next year. In addition, the ongoing push for Canadian pension funds to invest domestically and low foreign ownership of AC (23 per cent vs. 49-per-cent limit) could potentially aid the re-rating process.”