Risk Vs. Reward I have reviewed the comments on this site on CHR.B - and each must make thier own conclusion on this stock. This is a risk vs. reward question. That said - prior to the dividend cut - most of the major analysts covering CHR.B were bullish with an average price target north of $4.00. One has to question the credability of an analyst who switches thier recommendation and price target from one extreme of $4.75 to $1.50 when all that took place essentially was a 50 percent dividend cut and missed Q1 target. To quote another major analyst - "the funadmentals of this stock did not change" (I would challenge those reading to counter this claim). There is no new information that warrants what we have seen in the share price of Chorus. The potential outcomes around the ARB ruling is not new. New entrants (ie. Westjet) into the regional marketplace is not new. The expiriy of the AC contract in 2020 is not new.
Indeed - to echo another analyst who was claiming not too recently that "the relationship between Chorus and Air Canada" is symbiotic - I would continue to argue there is no other carrier today with the fleet size (scale) and flexibility to offer the routes currently provided by Jazz - so any notion that AC will shoot themselves in the foot by severing thier relationship with Chorus after 2020 would only be plausible if another carrier like Sky Regional assumed the fixed cost to ramp up thier fleet size. Last check - Sky Regional had 5 planes and 100 employees and a very limited number or routes. Other regionals simply do not have scale. To me - that outcome after 2020 does not seem plausible.
Sure - there are new entrants coming into the market with more efficient planes that will drive competition and lower costs - but even West Jet will be slowly phasing into the regional market with thier Q400s (they will not be coming in with a bang to match Chorus route for route).
The recent dividend cut only strengthens the balance sheet over the long term. The severence costs paid in Q1 and throughout the year will further strengthen the balance sheet and EPS over time. The gradual fleet renewal is laying the groundwork to allow CHR the ability to be cost competitive. Chorus has a 7 year runway to get their costs in line with thier current AC contract - so any talk of them being a going concern this early in the game seems a bit premature to me. At current these prices - nearing a 15% yield at $0.30 (annually) which I would argue is more than sustainable through 2015 (with current cash, plus dividend savings, and forecasted free cash flow less capex, and fleet renewal costs being funded by debt - dividend coverage is relatively secure through 2015 even with a negative ARB ruling)....it would seem to me that the upside far exceeds any further downside which seems to have been priced into the stock.
I am going long on CHR.B - at least through 2015. I am placing a bet we are near a bottom and there are plenty of upside catalysts that - with dividends - should make this a profitable position over the long term.