Air Canada Beats Estimates, Stock Soars

One day’s gain doesn’t make for a great long-term thesis.

Iain Butler ❯

Chief Investment Advisor, Motley Fool Canada Fool since November 2012 Iain Butler, CFA, is Lead Advisor on Discovery Canada 2017. He is also the Chief Investment Advisor for Motley Fool Canada and is the lead advisor on its flagship Stock Advisor Canada product. Before joining the Fool, Iain was a “buy-side” analyst and through this experience is well-versed in the idiosyncratic ways of the Canadian market. His investing interests are centred on scouring the market for interesting businesses that trade at reasonable prices and offer an appealing risk/reward relationship. Since joining the Fool in 2012, Iain dedicates each day to spreading Foolishness throughout this great country!

Published August 7, 2013 3:18 pm EDT

Air Canada’s (TSX:AC.B) stock is flying on Wednesday after announcing better than expected quarterly results.

With just over an hour in trading to go, the stock sits up a tidy 25% after more than 8 million shares have traded hands thus far. That’s a slight increase over the typical 1.1 million or so that trade on an average day.

Capital IQ indicates that normalized earnings for our national airline came in at $0.41 vs. an estimate of $0.13. The company exceeded estimates on the top line as well, as quarterly revenues checked in at $3.057 billion vs. the estimated $3.018 billion. Incidentally, this was the best second quarter revenue ever.

Increased sales of inflight earphones have been attributed to this beat. Not really.

Positive year-over-year yield growth of 1.5% was no doubt a factor in this huge move by the stock, particularly after WestJet (TSX:WJA) reported that yield growth had turned negative in the Q2’13.

Cost containment was another big positive. Management now expects costs to be down 1% to 2% in 2013 vs. the projected -0.5% to -1.5%. Lower maintenance costs appear to be behind this improved forecast.

Maintenance is precisely the area that frequent flyers are happy to see costs being contained. Again, not really.

The Foolish Bottom Line

If you bought Air Canada shares yesterday and sold them today, congratulations, you are in the minority of investors that have ever made money on an airline stock. While the company appears to be flying along smoothly at the moment, you can almost bet that it won’t always be so. And with a still wonky balance sheet that carries more than $3 billion of debt and negative equity, Air Canada faces significant long-term financial risk alongside the implied business risk that its industry holds. Investors beware!

Hate business risk? And financial risk? You’re not alone. That’s why we’ve created a special FREE report that profiles 3 companies that are so dominant that these risks hardly apply. Click here now to download “3 U.S. Companies That Every Canadian Should Own”. It’s free!

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler does not own shares in any company mentioned at this time. The Motley Fool doesn’t own shares in any of the companies mentioned.