On today’s TSX Breakouts report, there are 32 stocks on the positive breakouts list (stocks with positive price momentum), and seven stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a security that may soon appear on the positive breakouts list. Next month, the company is set to release its fourth-quarter financial results at which time management may provide insights into the integration of its recent acquisition. The stock has 15 buy recommendations and top pick recommendations from two analysts on the Street – Timothy James from TD Securities and Fadi Chamoun from BMO Nesbitt Burns. The consensus target price implies there is over 33-per-cent upside potential in the share price over the next year. The security highlighted below is Air Canada (AC-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
Montreal-based Air Canada is the country’s largest airline and amongst the 20 largest airlines worldwide.
There is seasonality in the business with the third-quarter being the strongest quarter and before the market opened on Oct. 31, the company reported its third quarter financial results. Air Canada reported EBITDAR (earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent) of $1.265-billion, slightly ahead of the consensus estimate of $1.238-billion. Adjusted earnings per share came in at $2.03, which was shy of the consensus estimate of $2.10. Revenue per available seat mile (RASM) was 16.3 cents, up 4 per cent year-over-year. The share price spiked over 6 per cent that day.
On the earnings call, management provided a positive outlook for the fourth-quarter. The chief executive officer Calin Rovinescu remarked, “The economy has been strong. Our view is that this will continue, leading to modest GDP growth. Unemployment rates are at record lows and the recent settling of the U.S.-Mexico-Canada trade deal removes an overhang uncertainty. We expect our year-over-year PRASM [passenger revenue per available seat mile] performance both in the domestic market and on a system basis to continue to improve in the fourth quarter. With a healthy demand outlook for Q4 [fourth quarter], coupled with favorable pricing trends, we expect the higher revenue to fully offset the increase in fuel price in the fourth quarter.”
Looking out to 2019, chief financial officer Mike Rousseau indicated that EBITDAR margins are anticipated to return to between 17 per cent and 20 per cent. During the first nine months of 2018, the EBITDAR margin stood at 16.7 per cent.
On Feb. 15, the company is expected to report is year-end results before the market opens. The consensus EBITDAR estimate is $524-million and the Street is forecasting earnings per share of 16 cents. On Jan. 10, the company completed the acquisition of the Aeroplan loyalty business from Aimia Inc. Consequently, management may provide additional insights into the integration of Aeroplan with the release of its fourth-quarter financial results.
Dividend Policy
The company does not pay shareholders a dividend.
Analysts’ recommendations
According to Bloomberg, there are16 analysts with recommendations on the stock, of which 15 are buy recommendations and one analyst (Ben Cherniavsky from Raymond James) has a ‘market perform’ recommendation.
Revised recommendations
Earlier this month, four analysts increased their target prices while one lowered her expectations.
Timothy James, the analyst from TD Securities, boosted his target price to $44 from $35. Cam Doerksen, the analyst form National Bank Financial, increased his target price to $37 from $32. Walter Spracklin, the analyst from RBC Capital Markets, tweaked his target price higher to $36 from $35. Turan Quettawala from Scotia Capital hiked his target price to $38 from $33. Taking an opposing position, Helane Becker from Cowan trimmed her target price by $1 to $33.
Financial forecasts
The consensus earnings per share estimates are $2.40 in 2018, rising 60 per cent to $3.84 in 2019. For 2020, the Street is anticipating earnings per share of $4.56.
Earnings estimates for next year have been rising in recent months. For instance, three months ago, the consensus EPS estimate were $2.46 for 2018 and $3.36 for 2019.
Valuation
Analysts commonly value the stock on an enterprise value-to-EBITDAR or a price-to-earnings (P/E) basis.
According to Bloomberg, the stock is trading at a P/E multiple of 7.2 times the 2019 consensus estimate, which is above its three-year historical average of 5.8 times but below its peak multiple of over 12 times during this period, suggesting there is room for multiple expansion.
The average one-year target price is $36.87, suggesting there is over 33 per cent upside potential in the share price over the next 12 months. Individual target prices are as follows in numerical order: $24 (the low on the Street is from the analyst at Raymond James), $32, two at $33, $34, $35, two at $36, $37, $38, two at $42, two at $44 and $45 (the high on the Street is from the analyst at Macquarie).
Insider transaction activities
There has been mixed trading with both recent buying and selling activity reported by insiders.
Most recently, on Dec. 7, Murray Strom, vice-president – flight operations, invested approximately $60,000 in shares of the company. He purchased 2,200 shares at a cost per share of $27.29, initiating a portfolio position.
On Nov. 30, Carolyn Hadrovic, vice-president and corporate secretary, exercised her options and sold the corresponding number of shares (3,708) at a price per share of $29.195, leaving 3,000 shares in her account.
On Nov. 26, chief financial officer Mike Rousseau purchased 1,000 shares at a cost per share of $27.58 for an account in which he has control or direction over.
On Nov. 13, director Michael Green sold 3,750 shares at a price per share of $27.2979, trimming his account balance to 101,964 shares.
On Nov. 9, director Christie Clark bought 3,700 shares at a cost per share of $26.603, initiating a portfolio position.
Chart watch
For just over a year, the share price has been trading in a range principally between $22 and $28. The share price is once again advancing to the top end of this range. The stock has an initial ceiling of resistance at $30. A break above $30, could send the share price climbing to $35, its next major resistance level.
Looking at the downside, the stock price has initial technical support around $25, near its 200-day moving average (at $24.96). Failing that, there is strong technical support around $20.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
Jennifer Dowty