Some investors might be scratching their heads over why the shares of Groupe Aeroplan Inc. are down more than 34 per cent this year when the company has continued to gush cash. But the answer isn't hard to find: The market is growing concerned about the health of the Canadian economy and Aeroplan is seen as a weather vane for changes.
Aeroplan gets its revenue from so-called “air miles” that are accumulated by its four million members, via partners in the retail and banking sectors. It only stands to reason that when fewer air miles are being collected – by shoppers with fewer extra dollars to spend – that the company's growth will grind to a halt.
Indeed, Aeroplan is far more sensitive to economic changes than other consumer-oriented stocks, such as struggling retailers, simply because of its great success. Not long after it made its debut as an income trust in 2005, the units (which have become shares since Aeroplan's conversion into a corporation earlier this summer) soared more than 100 per cent, leading to a heady valuation.
At their peak, in late 2007, the shares commanded a trailing price-to-earnings ratio of almost 60 – implying expectations of stellar growth on the back of booming consumer spending, a strong labour market and a healthy climate for air travel.
Most of those conditions have since deteriorated. Air Canada, which is a major partner, is in deep trouble thanks to soaring fuel costs: The airline recently announced plans to cut 2,000 jobs and reduce its seat capacity by 7 per cent worldwide, which could translate into fewer air miles redeemed for flights. Meanwhile, Statistics Canada reported that 55,000 jobs disappeared in July, the biggest one-month drop since 1991.
“We like Aeroplan's business model, and believe the company is led by a very accomplished management,” Neil Linsdell, an analyst at Versant Partners, said in a recent note to clients. “However, it is the short-term worries floating over the Canadian and European economies that should be of concern to Aeroplan.”
Are these concerns already reflected in the share price? The shares traded yesterday at $15.69, down from a high of $24.40 at the start of the year (admittedly, part of the decline was due to Aeroplan's end as an income trust). At the lowest point in the selloff, the shares were lower than their debut more than three years ago. Even after a subsequent bounce, concerns about Aeroplan's future have already wiped out the bulk of the stock's gains since 2005.
That means it's a safer bet than it once was, but it's still by no means a cheap stock: The P/E ratio remains above 20. If you think Canada's sluggish economy will pick up soon, the stock might be close to a bottom. Otherwise, wait until the economic news turns nasty and buy it a little cheaper.
