US airlines have recovered their enterprise value post covid and AC is falling behind even with better financial performance. I m not comparing AC with other US airlines but has provided data below. DAL is the closest comparison given FCF and operating margin.
Below table shows a comparison of US airlines with AC, before covid and now. It is a very interesting picture and clearly shows how undervalued AC is and how much an opportunity AC presents for investors.
| FY 2019 to precovid |
| | SP | O/S shares (M) | Adj Net Debt (B) | Market Cap (B) | EV | | EPS | Optg margin | EBITDA | EV/ EBITDA | LR | FCF (M) | FCF/ Share |
| | Data | Data | Data | O/S shares * Sp | Adj Net Debt + Market Cap | Data | Data | Data | Ratio | Ratio | Data | FCF/(O/s Shares) |
| AAL | $28.0 | 430 | $29.0 | $12.0 | $41.0 | $3.8 | 8.1% | 5.40 | 7.60 | 4.30 | -$453 | -$1.05 |
| UAL | $92.0 | 250 | $11.0 | $23.0 | $34.0 | $11.6 | 10.5% | 6.84 | 4.97 | 2.40 | $2,381 | $9.52 |
| DAL | $60.0 | 640 | $6.5 | $38.4 | $44.9 | $7.3 | 14.1% | 9.03 | 4.97 | 1.60 | $4,164 | $6.51 |
| |
| AC | $52.0 | 270 | $2.9 | $14.0 | $16.9 | | $3.7 | 8.6% | 3.64 | 4.66 | 0.80 | $2,075 | $7.69 |
| End of 2023 (Estimated Q4) |
| | SP | O/S shares (M) | Adj Net Debt (B) | Market Cap (B) | EV | % of 2019 EV | EPS | Optg margin | EBITDA | EV/ EBITDA | LR | FCF (M) | FCF/ Share |
| | Data | Data | Data | O/S shares * Sp | Adj Net Debt + Market Cap | | Data | Data | Data | Ratio | Ratio | Data | FCF/(O/s Shares) |
| AAL | $13.5 | 653 | $30.0 | $8.8 | $38.8 | 95% | $2.4 | 7.2% | 4.30 | 9.03 | 3.92 | $937 | $1.43 |
| UAL | $41.0 | 333 | $21.0 | $13.5 | $34.7 | 102% | $10.7 | 10.3% | 5.20 | 6.63 | 2.3 | -$216 | -$0.65 |
| DAL | $40.0 | 643 | $20.0 | $24.8 | $45.7 | 102% | $6.3 | 10.0% | 5.32 | 8.59 | 2.80 | $2,000 | $3.11 |
| |
| AC | $18.5 | 358 | $5.0 | $6.6 | $11.6 | 69% | $5.0 | 11.0% | 4.10 | 2.79 | 1.20 | $2,542 | $7.10 |
Sources:
- Morning start equity analyst report 18th Oct 2023
- Airlines financial statements and investors documents
CURRENT MARKET VALUATION Enterprise value: Comparing pre-covid and current EV, we can see
DAL, UAL and AAL are now at (or even higher) pre-covid valuation.
Air Canada on the other hand is at 70% of pre-covid EV. I believe this is because all US airlines have had 1 full year (2022) of almost full capacity. Air Canada will have first almost full year (2023) impact in about 3 weeks from now and in fact will be better year they ever had in their history.
All airlines have increased either their share count or net debt or both during covid. E.g. Delta’s net debt has increased 300% but share count are similar to precovid. AC net debt will be (end of 2023) almost 60% higher but has added 32% more shares. UAL on the other hand has not only increased their net debt 3 fold but has also increased their shares by 60%.
EV/EBITDA: Even with better performance, market is valuing AC at EV/EBITDA ratio of 2.8 compared to 8.5 for DAL. Precovid most of the airlines had ratio around 5. Over next Qs, AC ratio should approach 4.5 (Target by few analysts) and that will still be conservative.
OPPORTUNITY LR: AC has achieved the lowest leverage ratio (1.4) and will be at 1.2 at end of 2023. Other airlines ratios are higher and will stay elevated because of high net debt and high capital spend in coming years.
FCF/share ((Cash from ops – Capital spend)/share count): FCF is one of the most important metric. This will fund future purchases, dividends to shareholders and share buy backs.
DAL FCF in 2023 is ~$2.0B because of capital spend. UAL (and to some extent DAL) have committed billions of $$ of capital spend in coming years, so much that UAL’s net debt will most likely increase. You can see why their FCF for 2023 is negative to very low (Q4 ‘23).
AC, on the other hand will have $2.5B FCF (2023) even with lot lesser revenue compared to US airlines. I have shared in my last post how AC will smoothly sail through 2025-2026 even with higher capital spend as they will produce enough FCF (not using cash on hand) to fund their capital spend.
FCF/share in 2023 AC = $7.0
DAL = $3.1
Precovid DAL and UAL sp were at 9-10 multiple of FCF/share. Now DAL is at 13 multiple. AC is at ~2.7 multiple. If AC valuation is to be similar to DAL, it should be at $65+ sp. In addition, AC will produce similar FCF in years 2024 and 2025.
Possible SP by Q1 2024: Below are possible projections of AC stock price by Q1 2024 based on valuations. Note by Q1 2024, AC TTM EPS will be > $6.0. DAL is currently @ $40 with 2023 EPS = $6.0.
| | SP | O/S shares (M) | Adj Net Debt (B) | Market Cap (B) | EV | % EV of 2019 | EPS | Optg margin | EBITDA | EV/ EBITDA | LR | FCF (M) | FCF/ Share |
| Projection 1 | $36.0 | 358 | $4.0 | $12.9 | $16.9 | 100% | $6.0 | 11.0% | 4.40 | 3.84 | 0.95 | $2,500 | $6.98 |
| Projection 2 | $44.0 | 358 | $4.0 | $15.8 | $19.8 | 117% | $6.0 | 11.0% | 4.40 | 4.49 | 0.95 | $2,500 | $6.98 |
Projection 1: If AC were to have similar valuation as of US airlines (100% EV as in 2019 ($16.9)), sp should be at $36.
Projection 2: If AC were to be evaluated based on EV/EBITDA ratio of 4.5 (Analysts) then sp should be at $44.
………….
Projection 3: If AC were to be evaluated similar to DAL, with EPS of $6.0 and similar PE ratio, sp should be >$40.
Projection 4: If we use precovid PE multiples (10), AC should be ~$60 after Q1 2024.
CONCLUSION: AC is producing more FCF than 2019 and more FCF/share than US airlines in 2023. It has highest operating margin and lowest risk (debt and leverage ratio) and this with operating at 10% lesser capacity than 2019. 2024 will be another record year. Using multiple evaluations, AC still comes out as the best airline investment opportunity. Sooner or later AC sp will achieve its full potential. May be a small dividend will encourage institutional investors to jump in.