Air Canada Holds Excellent (Relative) Value Today

The airline sector is one I can anticipate will have to battle some pretty bad turbulence and headwinds for quite some time. In the near-term, this turbulence is likely to show up as stock price volatility, and until the totality of government support/bailouts is announced, carriers such as Canada’s largest airline, Air Canada (TSX:AC), are likely to swing according to news flow related to when borders reopen and how comfortable passengers are with stepping on a plane again.

That said, as I have mentioned before in the value section of this website, a long-short strategy can be beneficial for those investors seeking to exploit market mispricing among two comparable companies. In this case, I think Air Canada could be a candidate for a long position, with the short on the other end of the play being many of the other major players.

Canadian airlines have typically struggled to keep up with U.S. and global peers in terms of valuation due to heavy regulation and unfavorable union contracts. Should this crisis allow for a reduction of regulation and/or union concessions, Canadian airlines could come out ahead.

The discount Air Canada continues to trade of relative to its peers is largely unwarranted, and I have said this for some time. I think over time, Air Canada will more closely follow the valuation multiples of its peers, and therefore should be considered a speculative value pick as the long side of a long-short trade on the airline sector.

Invest wisely, my friends.