On Wednesday Air Canada (TSX:AC)(TSX:AC.B) reported its fourth-quarter earnings. Low oil prices helped push the company’s adjusted annual profit to a record high for the second year in a row. Adjusted net income for 2015 was $1.2 billion, trouncing 2014’s result of $531 million. For the fourth quarter specifically, earnings were $0.40 a share, roughly in line with Wall Street’s expectations.
Still, shares dropped 12% on the day. What’s going on?
It’s all in the adjustments
The company’s adjusted numbers remove the effects of non-operating items like foreign exchange rates, pension obligations, and shifting values of its fuel-hedging contracts. These items, however, have a significant impact on its profitability. Without adjustments, Air Canada posted a quarterly loss of $116 million, even worse than its $100 million loss in the fourth quarter of 2014. More concerning may be an impending adjustment regarding how much information the company will disclose to shareholders.
From now on, instead of releasing monthly traffic statistics, Air Canada will only disclose them quarterly. It seems as if there is a debate on whether this is to avoid an overly short-term focus or if something more nefarious is going on. Typically, the market prefers to have more data about its investments, not less.
Management argues that its new approach simply represents taking a long-term view. “To be very blunt,” its CEO says, “we’re not running this company for the benefit of short-term investors from a day-to-day basis or from a month-to-month basis.”
He even challenged short-term investors to sell the stock in hopes of creating a more reliable investor base. “We’ll see what the stock price does,” he said. “If short-term investors don’t like this, I can encourage them to leave. We’re running this company for the benefit of our long term stakeholders.”
Perhaps the 12% drop is an overreaction
While using adjusted earnings comes with plenty of caveats, there is an argument to be made that it better represents the health of Air Canada’s underlying business. As to the adjustment in reporting, there are no signs that management is trying to cover anything up.
Even while a weak Canadian dollar reduced the number of Canadians flying abroad, the company saw traffic growth of 8.6% in the fourth quarter, reflecting traffic increases in every one of Air Canada’s five markets. If the company is trying to hide something, it seems odd that it would choose to do so when the company is posting its best numbers in years.
Additionally, the company made multiple announcements that should help fundamentals improve even more in 2016. For example, the Quebec government agreed to drop a lawsuit related to maintenance commitments against the company. Air Canada also noted its plan to generate 90% of new capacity growth from international markets. This should help mitigate the negative impacts a weakening Canadian economy could inflict.
“We are better immunized from weaknesses in Canada than ever before, including weakness in Alberta,” said the company’s CEO.
If you’re a long-term investor, it looks like the 12% drop is a great opportunity to add to a position.
