Air Canada T.AC

What Kevin Chiang of CIBC actually said...

[kingnick311]

Though he noted an "uncertain" economic backdrop and "heightened volatility" in equity markets don't normally provide a macro environment that "bodes well" for airline stocks, CIBC World Markets analyst Kevin Chiang said he remains "constructive on the fundamental changes afoot within the Canadian aviation space."

"We are not here to debate whether the Canadian economy will grow or shrink in 2016," said Mr. Chiang in a research note on the sector's 2016 outlook . "This is an exogenous variable. We do point out, however, that the airlines are investing to create a less cyclical demand profile. Air Canada lowering its cost structure to tap into leisure travelers and WestJet becoming less geographically concentrated helps to de-risk their business models. We continue to view Air Canada as the airline best positioned to take advantage of the structural improvements in the airline sector. Its valuation remains at a steep discount to its peers and the company has an improving competitive profile and greater geographic exposure. For investors seeking a more 'defensive airline,' we recommend Chorus given its fixed fee compensation structure, compelling dividend yield, reduced counterparty risk, and valuation."

He added: "It must be frustrating for Canada’s main airlines to post record results, delivering on their financial targets, and yet see their share prices under pressure. Unsurprisingly, and as we have noted in previous reports, this circumstance is a function of investor disbelief that airlines are truly investible vehicles and of concerns over whether the sector will remain “rational.” With the Canadian airlines in the midst of executing on their long-term strategies, fundamentally we do not foresee our views on Air Canada, Chorus, Transat, or WestJet changing significantly. Instead, the question is whether 2016 is the year these airlines can convert the skeptics, especially given where their multiples trade today. Interestingly, we would argue that Air Canada and WestJet have addressed a number of concerns that investors have had historically about putting money into airlines, but we suspect that the noise around jet fuel prices and FX has served to distract."

For Air Canada (AC-T), he maintained his "sector outperformer" rating, but he lowered his price target for the stock to $16.50 from $18. Consensus is $17.30.

He also dropped his target for WestJet Airlines Ltd. (WJA-T) to $28 from $31, compared to a consensus of $28.13. He did not alter his "sector outperformer" rating.

"Perversely, it might take a recession to highlight the improved resiliency of airline profitability today to drive a positive re-rating," said Mr. Chiang. "Given we are not calling for a recession in Canada, we do highlight that the airlines today have a higher-margin buffer and increased capacity flexibility (i.e., increased variable costs). In essence, the multiples at which AC and WJA are trading ignore the improved earnings quality and the ability to better generate profits through a cycle."