Should You Buy, Sell, or Hold Air Canada Today?

Air Canada (TSX:AC) released record fourth-quarter earnings on the morning of February 11 and its stock has responded by falling over 8%. Should you buy on the dip?

Air Canada (TSX:AC), the largest full-service airline in Canada, announced fourth-quarter earnings on the morning of February 11 and its stock has responded by falling over 8%. Let’s break down the quarterly results and the company’s outlook on fiscal 2015 to determine if we should consider using this weakness as a long-term buying opportunity, or a major warning sign.

The quarterly results are in

Here’s a summary of Air Canada’s fourth-quarter earnings compared to its results in the same period a year ago.

Metric Reported Year Ago
Earnings Per Share $0.23 $0.01
Revenue $3.10 billion $2.89 billion

Source: Air Canada

Air Canada’s adjusted earnings per share increased 2,200% and its revenue increased 7.3% compared to the fourth quarter of fiscal 2013. The company’s immense earnings per share growth can be attributed to adjusted net income increasing 2,133.3% to $67 million, while its strong revenue growth can be attributed to the total number of revenue passengers carried increasing 8.1% to 9.19 million for the quarter.

Here’s a breakdown of 10 other notable statistics and ratios from the report compared to the year-ago period:

  1. Seats dispatched increased 6.2% to 11.95 million.
  2. Available seat miles increased 8.5% to 17.4 billion.
  3. Revenue passenger miles increased 9.4% to 14.09 billion.
  4. Passenger revenue per available seat mile decreased 0.6% to 15.6 cents.
  5. Adjusted cost per available seat mile (CASM) remained unchanged at 12.1 cents.
  6. Passenger load factor improved 70 basis points to 81%.
  7. Aircraft in operating fleet increased 3.4% to 364.
  8. Adjusted earnings before interest, taxes, depreciation, amortization, and aircraft rent increased 15.2% to $319 million.
  9. Economic fuel costs per litre decreased 8.7% to 80.7 cents.
  10. Return on invested capital improved 160 basis points to 12.1%.

Air Canada provided its outlook on fiscal 2015, calling for the following performance compared to fiscal 2014.

  • Available seat miles to increase 9%-10%
  • Seats dispatched to increase 2.5%-3.5%
  • Adjusted CASM to decrease 0.75%-1.75%
  • Jet fuel price of approximately $0.67 per litre
  • Canadian GDP growth of 1.75%-2.25%

Should you buy shares of Air Canada today?

Air Canada is Canada’s largest full-service airline, and increased traffic led it to a very strong fourth-quarter performance, but its stock has responded by falling over 8%.

I think the large post-earnings drop in Air Canada’s stock represents an intriguing long-term buying opportunity, because it now trades at very low valuations, including only 7 times its adjusted earnings per share of $1.81 for fiscal 2014 and a mere 6.7 times analysts’ estimated earnings per share of $1.89 for fiscal 2015, both of which are extremely inexpensive compared to its five-year average price-to-earnings multiple of 32.7.

With all of the information above in mind, I think Air Canada represents one of the best long-term investment opportunities in the market, so Foolish investors should take a closer look and strongly consider scaling into positions today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

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