On Thursday, Jefferies initiated coverage on shares of Air Canada (AC:CN) (OTC: ACDVF) with a Hold rating and set a price target of C$20.00.
The firm highlighted Air Canada's position as the national carrier, noting its strategic use of 6th Freedom connectivity, which allows it to transport passengers between two foreign countries through a Canadian hub. Additionally, the airline's competitive domestic cost structure compared to low-cost carriers (LCCs), and its expanding cargo and loyalty programs were recognized as key advantages.
Despite these strengths, Jefferies pointed out that significant cost efficiencies for Air Canada are not expected until after 2026, as the company works on restoring its network and refreshing its narrowbody (NB) fleet. In the interim period from 2024 to 2026, the firm anticipates Air Canada will generate only C$150 million in free cash flow (FCF), markedly less than United Airlines' (UAL) expected $5 billion and Delta Air Lines' (NYSE:DAL) projected $10 billion.
The Hold rating is supported by a valuation based on 3.5 times the airline's projected 2025 earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR). This valuation reflects a 1.5-turn discount compared to its United States peers, according to the firm's analysis.
Jefferies' outlook for Air Canada suggests a cautious approach, acknowledging the airline's potential and market positioning, while also considering the financial headwinds it faces in the medium term. The price target of C$20.00 is informed by these factors, positioning Air Canada's stock for investors to watch as it navigates the coming years.
InvestingPro Insights
Recent analysis from InvestingPro offers additional insights into Air Canada's financial standing and market performance. One of the key InvestingPro Tips for Air Canada highlights that the company is trading at a low earnings multiple with a P/E ratio of 22, suggesting that the stock could be undervalued relative to its earnings potential. This aligns with Jefferies' valuation approach, which takes into account the airline's projected earnings in the coming years.
Furthermore, while Air Canada does not pay a dividend to shareholders, which could be a deterrent for income-seeking investors, it is worth noting that the company has been profitable over the last twelve months. This profitability, as mentioned by another InvestingPro Tip, is expected to continue, with analysts predicting the company will remain profitable this year. This could provide some reassurance to investors considering the company's medium-term financial headwinds outlined by Jefferies.
InvestingPro Data metrics reveal a mixed picture. Despite a revenue decline of 12.45% in the last twelve months as of Q1 2024, the company saw a quarterly revenue growth of 22.15% in Q1 2024. Additionally, Air Canada's market cap stands at 740.06M USD, and its stock price is currently trading at 89.49% of its 52-week high, indicating that the stock is nearing its yearly peak.
For those seeking a more comprehensive analysis, InvestingPro provides a total of 9 additional InvestingPro Tips for Air Canada, which can be found at https://www.investing.com/pro/AC. Readers can also take advantage of an exclusive offer using coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, providing a deeper dive into the company's financials and market position.
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