Air Canada’s Stock Soars Following its Q1 Report: What Should You Do Now?

Air Canada (TSX:AC) released its first-quarter earnings results on April 29, and its stock has reacted by rising over 10%. Should you buy in to or avoid the rally?

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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:

  1. Seats dispatched increased 6.8% to 13.18 million
  2. Capacity (available seat miles) increased 8.2% to 19.83 million
  3. Traffic (revenue passenger miles) increased 7.7% to 16.09 million
  4. Cargo revenue decreased 10.1% to $116 million
  5. Other revenues increased 8.7% to $363 million
  6. Earnings before interest, taxes, depreciation, amortization, and aircraft rent (EBITDAR) increased 4.1% to a record $460 million
  7. EBITDAR margin improved 20 basis points to 13.8%
  8. Operating income decreased 23% to $154 million
  9. Operating margin contracted 160 basis points to 4.6%
  10. Net cash flows from operating activities increased 19.5% to $968 million
  11. Reported a cash use of $148 million compared with free cash flow of $385 million in the year-ago period
  12. 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.

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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