Is it Time to Take Your Profits on Air Canada (TSX:AC) and Run?

Air Canada (TSX:AC)(TSX:AC.B) is vulnerable to rising oil prices and a weakening consumer, so investors would be wise to consider taking at least some of their profits off the table.

Karen Thomas, MSc, CFA

Karen is a stock market enthusiast focused on uncovering those stocks that she believes the market has mispriced. She does this through fundamental and quantitative analysis of companies and their industries, as well as a study of future opportunities and trends. She holds a Masters degree in Finance, the CFA designation, and has over 20 years of experience in the investment management industry. Having worked at a major pension fund, as well as two leading mutual fund firms as an analyst and portfolio manager, she has solid investing expertise which she aims to share with her readers.

Published February 21, 2019 4:00 pm EST

Air Canada’s (TSX: AC)(TSX:AC.B) reported better-than-expected results off strong traffic and higher, but manageable fuel costs.

The stock has a five-year return of 450%, a two-year return of 143%, and a one-year return of 34%, making it a clear winner in the last few years. This has been contrary to historical popular opinion on airliner; they’ve typically been seen as money-losing, cyclical stocks that are a trap for investors.

But Air Canada seems to have changed this fact, and with the transformation of the airliner, its goal is to make the business a money-making one through the cycles.

Cost-cutting, better capacity utilization, a revamping of routes, an investment in fleet modernization, international expansion, network diversification, and the rollout of Rouge have taken Air Canada’s stock and business to new heights.

But with regard to the stock price, in my view, it will trade based on investors’ expectations for crude oil prices (jet fuel costs) and the health of the consumer, and while Air Canada’s transformation is way more than just those two variables, they are nonetheless still big variables.

Jet fuel is still the airliner’s biggest single cost, at 26% of revenue, and with oil prices continuing their climb in 2019, this does not bode well for Air Canada. The WTI crude oil price is closing in on $60, and with supply disruptions from various oil-producing countries continuing, the price still has upside potential.

And with the consumer facing record debt loads, a weakening housing market, and risks to the economy, this cyclical stock is looking vulnerable.

Trading at almost $33 per share, this stock is on a roll.

But I think that now is a good time to pat yourself on the back for a job well done and take your profits; this stock is facing major headwinds, as the macro environment is worsening.

To this you might ask: “What about the continued cost savings that Air Canada expects to achieve”?

In response, I would say that while I agree, as it seems that continued fleet reconfiguration and other strategies will enable the airliner’s transformation to achieve even more cost savings in the years ahead, if the macro environment turns, with lower consumer wealth reducing consumer spending, this will overshadow the savings.

But if you still believe in the stock, despite these headwinds, I would at least take some money off the table to reduce your exposure to what could be major downside in the next few years.