On Friday, Jefferies initiated coverage on Air Canada (AC:CN) (OTC: ACDVF) with a Hold rating and a stock price target of C$20.00. The firm highlighted Air Canada's position as the country's flag carrier, emphasizing its unique advantages such as the 6th Freedom connectivity, a competitive domestic cost base when compared to low-cost carriers, and its expanding cargo and loyalty programs. These factors contribute to Air Canada's appeal as a comprehensive choice for Canadian travelers.
The analyst pointed out that while the airline has several strengths, significant cost efficiencies are not expected to materialize until post-2026. This is due to the time required for the network to be fully restored and the narrow-body fleet to be refreshed.
Air Canada is projected to generate only C$150 million in free cash flow (FCF) from 2024 to 2026, which is considerably less than the FCF of its United States counterparts, with United Airlines expected to generate $5 billion and Delta Air Lines (NYSE:DAL) to produce $10 billion in the same period.
The C$20.00 stock price target set by Jefferies is based on a multiple of 3.5 times Air Canada's projected 2025 EBITDAR (earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs). This valuation represents a 1.5-turn discount to its U.S. peers, reflecting the analyst's cautious outlook on the airline's near-term financial performance.
Jefferies' initiation of coverage provides investors with a current assessment of Air Canada's market position and future prospects. The Hold rating suggests that the firm sees the airline's stock as fairly valued at present, considering both its potential and the challenges it faces in the near to medium term.
Investors and market watchers now have an additional perspective on Air Canada's financial outlook and operational strategy as the company works towards enhancing its network and fleet amidst the competitive landscape of the aviation industry.
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