By Ketki Saxena
Investing.com -- Air Canada (TSX:AC) shares rose 1.82% today, as Scotiabank (TSX:BNS) analyst Konark Gupta raised his short-term outlook for the stock and reiterated a sector outperform rating, noting that demand in the near term is expected to rebound faster than anticipated.
However, the Scotia Capital analyst reduced his long-term outlook on Air Canada, slashing the stock’s 12-month price target from $31 to $26, citing the soaring cost of jet fuel and other inflationary pressures as headwinds for the airline’s struggle to rebound to pre-pandemic levels.
Air Canada Price Target Cut At Scotia
In a research note, Gupta stated “While it is hard to predict the timing or depth of a potential downturn, we think inflation (Canadian CPI was up 7.7 % year-over-year in May) and rate hikes (BoC has raised by 1.25 % year-to-date) warrant some caution about consumer and business discretionary spending (including air travel) in the future”, adding that “Elevated fuel prices, along with strong pent-up demand, are driving air fares higher, which could also trigger demand destruction at some point as inflation in pretty much everything reduces consumers’ spending power.”
However, Scotia maintains a sector outperform rating on AC, citing Canadian airlines’ lagged recovery vs. U.S. peers due to Canada’s prolonged restrictions. Scotiabank analysts also raised their full-year estimates for traffic, revenue, EBITDA and free cash flow on AC, projecting demand to recover faster than previously anticipated.
Air Canada Most Shorted Stock on the TSX Yesterday
Interestingly, Air Canada was the most shorted stock on the TSX today, with 36.8% of its float sold short, as the Canadian flag carrier remains pressured by new COVID variants and continued weakness in business travel demand could keep delaying its financial recovery.
The Globe also notes that Air Canada has an extremely high days-to-cover ratio: (136 days).
Investing Pro Models also note Air Canada’s high net debt/total capital ratio of 34.0% as a risk factor. However, this metric remains within the range of competitors, with Lufthansa (ETR:LHAG) (35.3%), United Airlines (NASDAQ:UAL) (40.9%), Delta Air Lines (NYSE:DAL) (45.1%) and American Airlines (NASDAQ:AAL) (+60.8%) comparing unfavourably.
Fair Price Target (NYSE:TGT), Financial Upside
At 12:30 p.m in Toronto, Air Canada shares were trading at C$17.64, and with a 52-week range of C$16.45 - 27.41.
A consensus of 17 analysts covering the stock suggests a fair price target of $29.18, representing a 65.4% financial upside potential.