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Stock rallies seen for Canada's airlines even in soft economy

An Air Canada jet is seen on a runway.

Fred Lum/Fred Lum/THE GLOBE AND MAIL

Economic downturns usually make for a turbulent ride for airline stocks as fewer people take to the skies for pricey vacations and many businesses slash travel budgets.

But even if the doomsayers' predictions of a double-dip pullback come true, Canaccord Genuity analyst David Tyerman thinks WestJet Airlines Ltd. will pull through it just fine.

Under a double-dip scenario, he sees WestJet's earnings per share dropping by a painful 21 per cent. But based on his current target valuation of the stock, which uses a conservative enterprise value of 5.5 times earnings before interest, taxes, depreciation and amortization, he believes the current share price still looks attractive.

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"A double-dip scenario hurts, but the stock looks like it is already more than discounting a fairly severe downturn," Mr. Tyerman said in a research note.

Looking further ahead, he believes WestJet offers an "attractive investment opportunity for solid revenue growth and margin expansion."

He maintained a "buy" rating and $21 price target.

Mr. Tyerman also sees big upside in Air Canada stock, even though he reduced his price target by 75 cents to $6.50 to reflect expected weak economic conditions.

"We believe that outlook and labour concerns may be affecting AC's share price," Mr. Tyerman commented. "Improvements on these variables could potentially produce a strong share price recovery, especially given AC's financial leverage." He estimates Air Canada would be sitting on more than $1-billion in cash during a double-dip economic downturn, which he thinks will be adequate.

He expects Air Canada to enjoy a strong increase in profitability over the longer term.

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Hanfeng Evergreen Inc. reported fiscal fourth-quarter earnings per share of 3 cents, far below the consensus estimate of 11 cents, amid disappointing Chinese fertilizer shipments. Production issues and a maintenance shutdown at its Heilongjiang facility were largely blamed.

"We believe the company has shown that we have returned to another quarter of operational issues, the third quarter out of the past four where significant issues have been present," commented Canaccord Genuity analyst Keith Carpenter. Given these recurring issues and the general negative sentiment toward China-based companies, he downgraded Hanfeng to "sell" from "hold."

Downside: Mr. Carpenter slashed his price target to $2.15 from $5.75.

Swift Energy Co.'s focus on improving operations and its extensive experience is translating into better returns in each of the resource plays, said Canaccord Genuity analyst Marcus Talbert. "We believe SFY trades at an unwarranted discount to its peer group despite its growth prospects and strong liquidity position," he said.

Upside: Mr. Talbert raised his price target on the oil and gas exploration and development company to $55 (U.S.) and reiterated his "buy" rating.

Petroamerica Oil Corp. has reached separate agreements in Colombia that will see the oil and gas producer raise its interest in the El Eden block while withdrawing from the El Sancy project. "In our view, the streamlining of the company's assets is a positive development," commented Raymond James Ltd. analyst Rafi Khouri.

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Upside: Mr. Khouri maintained an "outperform" rating and 40 cent price target.

Aurizon Mines Ltd. expects a delayed feasibility study for its Joanna gold project to be finalized in early 2012, paving way for possible first production in 2015, noted Desjardins Securities Inc. analyst Brian Christie. This is later than his previous expectation for a startup in 2013, resulting in a reduction in his net asset value for the company.

Downside: Mr. Christie cut his price target by 50 cents to $9.25 and reiterated his "buy" rating.

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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