Stifel Canada initiated coverage on Air Canada (AC:CN) (OTC: ACDVF) with a Hold rating and a price target of C$20.00. The firm's analysis suggests that while the airline has made significant strides since the COVID-19 pandemic, it is currently in a phase of rebuilding. The analyst from Stifel Canada believes that Air Canada is approaching a turning point, supported by favorable demographic trends that could strengthen a long-term investment case for the airline.
The decision to start with a Hold rating takes into account the anticipated volatility in the second half of 2024. This forecasted instability is attributed to several factors, including the implications of Air Canada's new pilot contract and potential downward pressures on the company's 2025 financial estimates.
Concerns have been raised regarding the sustainability of leisure travel demand, the normalization of yields and load factors due to increased industry capacity, and rising costs across the board.
Despite these challenges, the analyst acknowledges that Air Canada's valuation, at 3.0 times its projected 2025 EBITDA, already seems to factor in these significant risks. The airline's future performance is expected to become clearer as it reveals its targets for growth, profit margins, and strategies for managing capital expenditures in conjunction with providing returns to shareholders, especially as it updates its narrowbody aircraft fleet.
The Stifel Canada report concludes that should Air Canada effectively communicate its plans and meet its targets, there is potential for the stock to regain momentum and align more closely with the valuations of U.S. airlines.
The analyst's commentary indicates that Air Canada has been working towards reducing the valuation disparity with its American counterparts, a process that was well underway before the pandemic-induced disruption.
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