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Air Canada (Timothy Stake/CNW Group)
Air Canada (Timothy Stake/CNW Group)

Eye on Equities

As labour woes mount, Air Canada shares going cheap: CIBC Add to ...

Air Canada shares appear to have left longer-term fundamentals at the gate and are now trading on the bombardment of negative news flow that has engulfed the airline, according to CIBC World Markets Inc. analyst Kevin Chiang. He thinks this presents steely investors with a rare opportunity.

On the surface, the Air Canada story is not a happy one. The stock has declined 17 per cent year-to-date and is at a 35-month low. Meanwhile, the XAL Index (which tracks the aggregate performance of major airlines) is up 15 per cent.

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Air Canada’s labour woes have been particularly acute recently. Earlier this month, the company was facing a looming strike by its machinists and a lockout of its pilots. An intervention by Federal Labour Minister Lisa Raitt resulted in legislation that sent both disputes to binding arbitration, followed by a request by the minister to have the Canada Industrial Relations Board decide on whether Air Canada is a service essential for Canadians’ health and safety.

An alleged confrontation between Ms. Raitt and members of Toronto’s Pearson airport ground crew on Thursday led to a number of suspensions and touched off a 13-hour wildcat strike by workers in Toronto, Montreal and Quebec City. The strike disrupted dozens of flights across the country during the busy March break period and did little for the company’s public image or investor confidence.

“Needless to say, it has been a tough Q1,” says Mr. Chiang.

However, he believes that at current levels, many of the hurdles facing Air Canada have been priced in. “... the market has now incorporated the risk that the company's equity value could drop to zero, and that [Air Canada] succumbs to its headwinds,” he maintains.

Mr. Chiang does not expect the airline to file for restructuring under the Companies' Creditors Arrangement Act, and views the risk/reward profile on the stock as “compelling.”

Upside: Mr. Chiang upgraded Air Canada to “sector outperfomer” from “sector performer” and maintaining his $1.50 price target.

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MAG Silver Corp. reported encouraging drill results from Cinco de Mayo in Mexico that suggest the project could potentially contain a silver-equivalent resource of at least 100 million ounces, said Canaccord Genuity analyst Nicholas Campbell. “We believe that the grade and resource potential of the Cinco De Mayo is not reflected in the current valuation for MAG Silver,” Mr. Campbell said.

Upside: Mr. Campbell raised his price target by $2 to $18 and maintained a “speculative buy” rating.

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First Quantum Minerals Ltd. released a new resource for its Sentinel project of 1 billion tonnes of ore at 0.51 per cent copper. The grade was well below the expectations of UBS analyst Matt Murphy, who notes it places the project as one of the lowest-grade African copperbelt deposits. It will also likely result in higher mine cash costs.

Downside: Mr. Murphy cut his price target by $2.50 to $23 but maintained a “buy” rating.

Also see: Copper the place to be for acquisitions

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Valeant Pharmaceuticals International Inc.’s $180-million (U.S.) acquisition of Russian company Natur Produkt is a small but strategic deal which allows the company to continue its expansion into central Eastern Europe, said UBS analyst Marc Goodman. Assuming 15 per cent revenue growth, 30 per cent operating margin, a 20 per cent tax rate for 2012 and a 6 per cent tax rate thereafter, the deal could add three cents to 2012 earnings per share and 8 cents to 2013, said Mr. Goodman.

Upside: He is maintaining his “buy” rating and $63 (U.S.) price target.

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McCoy Corp. was comfortably ahead of expectations in reporting fourth-quarter diluted earnings per share of 14 cents, noted Raymond James Ltd. analyst Steve Hansen. But he downgraded the producer in industrial equipment to “outperform” from “strong buy” because of the stock’s rally in recent weeks.

Upside: Mr. Hansen maintained a target price of $5.50.

Follow us on Twitter: @eyeonequities, @JodyJodyWhite

 
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