Why Flight Cancellations will Hurt Air Canada's Stock

Today we are looking at Air Canada Stock (TSX: AC.TO), to determine if the Air Canada stock is a good buy. We will look at AC.TO financial ratios, analyst ratings, and valuation to determine a Air Canada stock forecast and price. What does AC.TO Do? Air Canada provides domestic, U.S. transborder, and international airline services. It offers scheduled passenger services under the Air Canada Vacations and Air Canada Rouge brand name in the Canadian market, the Canada-U.S. transborder market, and in the international market to and from Canada, as well as through capacity purchase agreements on other regional carriers.  Gathering Information for an Air Canada Stock Forecast Who are Air Canada's Competitors? In order to undergo a comparable analysis (to determine AC.TO stocks value), we need to first outline who AC.TO's competitors are. These competitors need to be publicly listed, have valid financial metrics/multiples, operate in a similar manner to AC.TO, and have a market cap similar to AC.TO (if possible). By keeping this in mind, I found the following list of companies to be some of Air Canada stocks' closest competitors: TRZ.TO, DAL, AAL, and UAL  Air Canada Flight Cancellations and Financials Air Canada Recent News Coverage "Air Canada cancelled almost 10 per cent of their flights at Toronto Pearson in the first week of June. Those cancellations are split between departures and arrivals that took place between June 1 and June 7, Cirium, an aviation data company, told CTV News Toronto on Thursday." This is not great news for their stock, as their revenues will likely be less than expected, which might cause Air Canada to miss their guided earnings, and potentilly even their analyst earnings estimates.  Air Canada's Earnings are Mixed AC.TO Earnings (Yearly): AC.TO Revenues: In FY 2021, AC.TO experienced a yearly increase in revenues of $567M (or 9.72%) resulting in a total revenue figure of $6.4B. AC.TO Cost of Revenues: In FY 2021, AC.TO experienced a yearly decrease in their cost of revenues of $-126M (-1.55%), resulting in a total revenue figure of $8.02B. Since the decrease (of -1.55%), in AC.TO's cost of revenue was lesser (by -11.27%) than the increase (of 9.72%) in AC.TO's revenues, we should expect that AC.TO experience an increase in their FY gross profits. AC.TO Gross Profit: In FY 2021, AC.TO experienced a yearly decrease in their gross profit of $-1620000000--2313000000 (or -29.96%) resulting in a total gross profit of $-1.62B. This decrease is consistent with our conclusion from the comparison of revenues and cost of revenues between FY and FY. AC.TO EBITDA: In FY 2021, AC.TO experienced a yearly increase in their EBITDA of $693,000,000 (or +31.18%) resulting in a total EBITDA of $-1.63B. This increase (of +31.18%) stems from the fact that AC.TO experienced a increase in their gross profits of 29.96% (as we saw in the previous bullet point). AC.TO Net Income: In FY 2021, AC.TO experienced a yearly increase in their net income of $1,045,000,000 (or +22.49%) resulting in a total net income of $-3.6B. AC.TO EPS: As a result of AC.TO's increasein net income of $1,045,000,000, AC.TO's EPS also increased (by $6.22) from $-16.47 in FY 2020 to $-10.25 in FY 2021 Overall, Air Canada had a greatg fiancial performance as they were able to increase every meaningful metric, and decrease their cost of revenues. This is the best performance that you could ask for, but is it really all that  good in the case of Air Canada? Well, not so much, let me explain. In 2020, Air Canada had a terrible year, this comes as they 4x'd their worst financial year in histroy (2001) in which they reported losing $1.25B, which now seems like nothing compared to their 2020 reported loss of over $4.6B. As a result, it would have been difficult for Air Canada to not bounce back and post seemingly good earnings (and growth) in 2021. However, we can get a better idea of their financial position and growth by looking at their more recent quarterly reports (to determine if they are on the right track). AC.TO Earnings (Quarterly): AC.TO Revenues: In Q1 2022, AC.TO experienced a quarterly decrease in revenues of $-158M (or -5.79%) resulting in a total revenue figure of $2.57B. AC.TO Cost of Revenues: In Q1 2022, AC.TO experienced a quarterly decrease in their cost of revenues of $-71M (-2.68%), resulting in a total revenue figure of $2.58B. Since the decrease (of -2.68%), in AC.TO's cost of revenue was greater (by 3.11%) than the decrease (of -5.79%) in AC.TO's revenues, we should expect that AC.TO experienced an decreasein their Q1 gross profits. AC.TO Gross Profit: In Q1 2022, AC.TO experienced a quarterly decrease in their gross profit of $-87M (or -106.1%) resulting in a total gross profit of $-5M. This decrease is consistent with our conclusion from the comparison of revenues and cost of revenues between Q1 and Q4. AC.TO EBITDA: In Q1 2022, AC.TO experienced a quarterly decrease in their EBITDA of $194,000,000 (or -1,764%) resulting in a total EBITDA of $-205M. This decrease (of -1,764%) stems from the fact that AC.TO experienced a decrease in their gross profits of -106.1% (as we saw in the previous bullet point). AC.TO Net Income: In Q1 2022, AC.TO experienced a quarterly decrease in their net income of $481,000,000 (or -97.57%) resulting in a total net income of $-974M. AC.TO EPS: As a result of AC.TO's decrease in net income of $481,000,000, AC.TO's EPS also decreased (by $-1.16) from $-1.38 in Q4 2021 to $-2.54 in Q1 2022 Overall, it seems as though AC.TO had a poor financial performance as many of their financial metrics shrunk, most notably their EPS (by $-1.16), as well as their net income (by $481,000,000), and other metrics (as you can tell from the above bullet points). Furthermore, Air Canada missed their estimated EPS by -66.7% as they reported an EPS of $-2.54 versus their earnings estimate of $-1.52. As a result of Air Canada's declining financials, and the fact that they missed earnings, we can conclude that Air Canada might not be going down a good path, especially when recalling that they have been cancelling 10% of domestic/USA flights. No Possible AC.TO Stock Dilution? As part of their Q1 2022 earnings release, AC.TO stated that they currently have 358M Shares Outstanding (weighted average), which is up 0 shares (from 358M shares outstanding in Q4 2021). This is great news for Air Canada Stock investors as they do not have to worry about their investment being diluted. Furthermore, AC.TO stock has up to 0 of shares that they can issue (thereby diluting AC.TO's stock). This maximum dilution for the period would only have a dilutionary effect on AC.TO of 0%. This just reinforces my previous point that Air Canada investors do not have to worry about share dilution. Here is What Analysts are Rating the AC.TO Stock as Here is the current spread of AC.TO stock ratings. In total there are 2 AC.TO stock ratings, which fall in the following categories. 2 Buys 0 Holds 0 Sells Analyst Ratings have provided relatively strong indicators of future price movement, which is why they are used to determine if AC.TO stock is a buy or sell. The fact that only 2 analysts have coverage on Air Canada stock is not great, however, both of these analysts are confident that Air Canada's current valuation is low, and there is some upside here. Coming to an AC.TO Stock Prediction Using a Comparable Analysis to Determine a AC.TO Price Forecast Enterprise Value to Assets (EV/Assets): AC.TO's current EV/Assets ratio is 0.46, compared to the average EV/Assets ratio of AC.TO's peers being 0.49. This implies that AC.TO is overvalued and their share price should change by a factor of +6.5% to be at fair value (based on AC.TO's P/B compared to the P/B of their peers). Price to Sales (P/S): AC.TO stock P/S ratio is currently 0.88, compared to the average P/S ratio of AC.TO's peers being 0.58. This implies that AC.TO is overvalued and their share price should change by a factor of -34% to be at fair value (based on AC.TO's P/S compared to the P/S of their peers). Overall, AC.TO stock is overvalued and needs to experience a change in stock price of (an average of) -13.75% to be considered “at fair value”. This is contradictory to the opinions off the analysts, however it gives you a better idea why Air Canada may be overvallued rather than just a "Sell" rating. Is AC.TO a good stock to buy right now? Overall, we know that Air Canada has been rated as a "buy" by both of the analysts that have coverage on the AC.TO stock, and that Air Canada has no possible dilution. However, we also know that Air Canada has recently been cancelling more local/short flights, have been reporting poor recent earnings, and that our Air Canada stock forecast implies that AC.TO is overvalued and needs to experience a price change of -13.75%. As a result of  the culmination of all of this information, I have concluded that  The negative aspects of Air Canada Stock (financials, cancelling flights, and high ratios) outweigh the positive aspects of the Air Canada Stock (analyst ratings, and no diltion), which has lead me to having a bearish outlook on the Air Canada stock. I think that a 10% dercrease is reasonable to look out for.

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Why Flight Cancellations will Hurt Air Canada's Stock

Jun 13, 2022

bearish

general Analysis

[7 min Read]

blog post cover photo

Photo by: Rafael Leão

Today we are looking at Air Canada Stock (TSX: AC.TO), to determine if the Air Canada stock is a good buy. We will look at AC.TO financial ratios, analyst ratings, and valuation to determine a Air Canada stock forecast and price.

What does AC.TO Do?

Air Canada provides domestic, U.S. transborder, and international airline services. It offers scheduled passenger services under the Air Canada Vacations and Air Canada Rouge brand name in the Canadian market, the Canada-U.S. transborder market, and in the international market to and from Canada, as well as through capacity purchase agreements on other regional carriers.

Gathering Information for an Air Canada Stock Forecast

Who are Air Canada's Competitors?

In order to undergo a comparable analysis (to determine AC.TO stocks value), we need to first outline who AC.TO's competitors are.

These competitors need to be publicly listed, have valid financial metrics/multiples, operate in a similar manner to AC.TO, and have a market cap similar to AC.TO (if possible).

By keeping this in mind, I found the following list of companies to be some of Air Canada stocks' closest competitors:

TRZ.TO, DAL, AAL, and UAL

Air Canada Flight Cancellations and Financials

Air Canada Recent News Coverage

"Air Canada cancelled almost 10 per cent of their flights at Toronto Pearson in the first week of June.

Those cancellations are split between departures and arrivals that took place between June 1 and June 7, Cirium, an aviation data company, told CTV News Toronto on Thursday."

This is not great news for their stock, as their revenues will likely be less than expected, which might cause Air Canada to miss their guided earnings, and potentilly even their analyst earnings estimates.

Air Canada's Earnings are Mixed

AC.TO Earnings (Yearly):

  • AC.TO Revenues: In FY 2021, AC.TO experienced a yearly increase in revenues of $567M (or 9.72%) resulting in a total revenue figure of $6.4B.
  • AC.TO Cost of Revenues: In FY 2021, AC.TO experienced a yearly decrease in their cost of revenues of $-126M (-1.55%), resulting in a total revenue figure of $8.02B. Since the decrease (of -1.55%), in AC.TO's cost of revenue was lesser (by -11.27%) than the increase (of 9.72%) in AC.TO's revenues, we should expect that AC.TO experience an increase in their FY gross profits.
  • AC.TO Gross Profit: In FY 2021, AC.TO experienced a yearly decrease in their gross profit of $-1620000000--2313000000 (or -29.96%) resulting in a total gross profit of $-1.62B. This decrease is consistent with our conclusion from the comparison of revenues and cost of revenues between FY and FY.
  • AC.TO EBITDA: In FY 2021, AC.TO experienced a yearly increase in their EBITDA of $693,000,000 (or +31.18%) resulting in a total EBITDA of $-1.63B. This increase (of +31.18%) stems from the fact that AC.TO experienced a increase in their gross profits of 29.96% (as we saw in the previous bullet point).
  • AC.TO Net Income: In FY 2021, AC.TO experienced a yearly increase in their net income of $1,045,000,000 (or +22.49%) resulting in a total net income of $-3.6B.
  • AC.TO EPS: As a result of AC.TO's increasein net income of $1,045,000,000, AC.TO's EPS also increased (by $6.22) from $-16.47 in FY 2020 to $-10.25 in FY 2021

Overall, Air Canada had a greatg fiancial performance as they were able to increase every meaningful metric, and decrease their cost of revenues. This is the best performance that you could ask for, but is it really all that good in the case of Air Canada? Well, not so much, let me explain. In 2020, Air Canada had a terrible year, this comes as they 4x'd their worst financial year in histroy (2001) in which they reported losing $1.25B, which now seems like nothing compared to their 2020 reported loss of over $4.6B. As a result, it would have been difficult for Air Canada to not bounce back and post seemingly good earnings (and growth) in 2021. However, we can get a better idea of their financial position and growth by looking at their more recent quarterly reports (to determine if they are on the right track).

AC.TO Earnings (Quarterly):

  • AC.TO Revenues: In Q1 2022, AC.TO experienced a quarterly decrease in revenues of $-158M (or -5.79%) resulting in a total revenue figure of $2.57B.
  • AC.TO Cost of Revenues: In Q1 2022, AC.TO experienced a quarterly decrease in their cost of revenues of $-71M (-2.68%), resulting in a total revenue figure of $2.58B. Since the decrease (of -2.68%), in AC.TO's cost of revenue was greater (by 3.11%) than the decrease (of -5.79%) in AC.TO's revenues, we should expect that AC.TO experienced an decreasein their Q1 gross profits.
  • AC.TO Gross Profit: In Q1 2022, AC.TO experienced a quarterly decrease in their gross profit of $-87M (or -106.1%) resulting in a total gross profit of $-5M. This decrease is consistent with our conclusion from the comparison of revenues and cost of revenues between Q1 and Q4.
  • AC.TO EBITDA: In Q1 2022, AC.TO experienced a quarterly decrease in their EBITDA of $194,000,000 (or -1,764%) resulting in a total EBITDA of $-205M. This decrease (of -1,764%) stems from the fact that AC.TO experienced a decrease in their gross profits of -106.1% (as we saw in the previous bullet point).
  • AC.TO Net Income: In Q1 2022, AC.TO experienced a quarterly decrease in their net income of $481,000,000 (or -97.57%) resulting in a total net income of $-974M.
  • AC.TO EPS: As a result of AC.TO's decrease in net income of $481,000,000, AC.TO's EPS also decreased (by $-1.16) from $-1.38 in Q4 2021 to $-2.54 in Q1 2022

Overall, it seems as though AC.TO had a poor financial performance as many of their financial metrics shrunk, most notably their EPS (by $-1.16), as well as their net income (by $481,000,000), and other metrics (as you can tell from the above bullet points).

Furthermore, Air Canada missed their estimated EPS by -66.7% as they reported an EPS of $-2.54 versus their earnings estimate of $-1.52. As a result of Air Canada's declining financials, and the fact that they missed earnings, we can conclude that Air Canada might not be going down a good path, especially when recalling that they have been cancelling 10% of domestic/USA flights.

No Possible AC.TO Stock Dilution?

As part of their Q1 2022 earnings release, AC.TO stated that they currently have 358M Shares Outstanding (weighted average), which is up 0 shares (from 358M shares outstanding in Q4 2021). This is great news for Air Canada Stock investors as they do not have to worry about their investment being diluted.

Furthermore, AC.TO stock has up to 0 of shares that they can issue (thereby diluting AC.TO's stock). This maximum dilution for the period would only have a dilutionary effect on AC.TO of 0%. This just reinforces my previous point that Air Canada investors do not have to worry about share dilution.

Here is What Analysts are Rating the AC.TO Stock as

Here is the current spread of AC.TO stock ratings. In total there are 2 AC.TO stock ratings, which fall in the following categories.

  • 2 Buys
  • 0 Holds
  • 0 Sells

Analyst Ratings have provided relatively strong indicators of future price movement, which is why they are used to determine if AC.TO stock is a buy or sell. The fact that only 2 analysts have coverage on Air Canada stock is not great, however, both of these analysts are confident that Air Canada's current valuation is low, and there is some upside here.

Coming to an AC.TO Stock Prediction

Using a Comparable Analysis to Determine a AC.TO Price Forecast

  1. Enterprise Value to Assets (EV/Assets): AC.TO's current EV/Assets ratio is 0.46, compared to the average EV/Assets ratio of AC.TO's peers being 0.49. This implies that AC.TO is overvalued and their share price should change by a factor of +6.5% to be at fair value (based on AC.TO's P/B compared to the P/B of their peers).
  2. Price to Sales (P/S): AC.TO stock P/S ratio is currently 0.88, compared to the average P/S ratio of AC.TO's peers being 0.58. This implies that AC.TO is overvalued and their share price should change by a factor of -34% to be at fair value (based on AC.TO's P/S compared to the P/S of their peers).

Overall, AC.TO stock is overvalued and needs to experience a change in stock price of (an average of) -13.75% to be considered “at fair value”. This is contradictory to the opinions off the analysts, however it gives you a better idea why Air Canada may be overvallued rather than just a "Sell" rating.

Is AC.TO a good stock to buy right now?

Overall, we know that Air Canada has been rated as a "buy" by both of the analysts that have coverage on the AC.TO stock, and that Air Canada has no possible dilution. However, we also know that Air Canada has recently been cancelling more local/short flights, have been reporting poor recent earnings, and that our Air Canada stock forecast implies that AC.TO is overvalued and needs to experience a price change of -13.75%. As a result of the culmination of all of this information, I have concluded that

The negative aspects of Air Canada Stock (financials, cancelling flights, and high ratios) outweigh the positive aspects of the Air Canada Stock (analyst ratings, and no diltion), which has lead me to having a bearish outlook on the Air Canada stock. I think that a 10% dercrease is reasonable to look out for.

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AC.TO

Air Canada

16.04

-1.03
-6.03%

Return

16.04%
Change % Since Posting
3.07
Change Since Posting
19.11
Price When Posted

Metrics

17.19
Target Price
8/ 10
Confidence
1-2 Months
Timeframe
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