Air Canada (TSX:AC), Canada’s largest full-service airline, announced its first-quarter earnings results before the market opened on April 29, and its stock has reacted by rising over 10%. Let’s break down the results to determine if a rally of this magnitude is warranted, then decide if we should buy the stock today.
The results that ignited the rally
Here’s a summary of Air Canada’s first-quarter earnings results compared with its results in the same period a year ago.
| Metric | Q1 2016 | Q1 2015 |
| Adjusted Earnings Per Share | $0.30 | $0.41 |
| Operating Revenue | $3.34 billion | $3.25 billion |
Source: Air Canada
Air Canada’s adjusted earnings per diluted share decreased 26.8% and its operating revenue increased 2.9% compared with the first quarter of fiscal 2015. Its steep decline in earnings per share can be attributed to its adjusted net income decreasing 30.3% to $85 million, driven by a 4.6% increase in operating expenses, which it noted was due to the impact of its capacity growth and the unfavourable impact of a weaker Canadian dollar.
Its slight revenue growth can be attributed to its total number of revenue passengers carried increasing 5% to 9.96 million, which led to its revenues from passengers increasing 2.8% to $2.86 billion.
Here’s a quick breakdown of 12 other notable statistics from the report compared with the year-ago period:
- Seats dispatched increased 6.8% to 13.18 million
- Capacity (available seat miles) increased 8.2% to 19.83 million
- Traffic (revenue passenger miles) increased 7.7% to 16.09 million
- Cargo revenue decreased 10.1% to $116 million
- Other revenues increased 8.7% to $363 million
- Earnings before interest, taxes, depreciation, amortization, and aircraft rent (EBITDAR) increased 4.1% to a record $460 million
- EBITDAR margin improved 20 basis points to 13.8%
- Operating income decreased 23% to $154 million
- Operating margin contracted 160 basis points to 4.6%
- Net cash flows from operating activities increased 19.5% to $968 million
- Reported a cash use of $148 million compared with free cash flow of $385 million in the year-ago period
- Return on invested capital (ROIC) improved 220 basis points to 17.4%
Is the rally warranted?
It was a good quarter overall for Air Canada, but I did not see anything in the report that would warrant a rally of over 10%. I do, however, think the stock represents a great investment opportunity for the long term, mainly because it trades at incredibly inexpensive valuations, including less than three times fiscal 2016’s estimated earnings per share of $3.30.
With both of these thoughts in mind, I think Foolish investors should wait for the stock to come back down in to the $8 range to begin scaling in to long-term positions.
