Many investors fail to understand the crucial difference between earnings and free cash flow.
Often, a company can be quite profitable despite posting an earnings loss. Much of the time this comes from the amortization of intangible assets. Essentially, a company must write-off the value of these assets over time. This is an expense, but no cash physically leaves the company.
Aimia Inc. (TSX:AIM) is the perfect example of this. The operator of the Aeroplan frequent flyer program for Air Canada (TSX:AC) posted a loss of $0.55 per share in 2016. Free cash flow tells a very different story. Once we account for the various non-cash expenses, the company reported free cash flow of $233 million, or $1.42 per share.
That’s easily enough for the company to sustain its 8.9% yield.
Shares currently trade hands for less than $9 each. That gives Aimia a remarkably low price-to-free cash flow ratio of 6.3. You won’t find many cheaper valuations.
One reason suggested for Aimia shares trading at such a low level is the risk the company’s contract with Air Canada doesn’t get renewed. It’s up for renewal in 2020, and both sides benefit from the deal.
Aimia is unlikely to get the boot, but the market hates uncertainty. Remember, Aeroplan is Air Canada’s largest customer.
In addition, Aimia is a 49% owner of Aeromexico’s loyalty program, Club Premier. In 2015, Club Premier reportedly floated the idea of going public at a $1 billion U.S. Remember, Aimia has a market cap today of $1.36 billion.
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