Air Canada (TSX:AC) was once on top of the world. In 2012 the stock was valued at $1. By 2019, shares surpassed $50.
But there’s a catch: the coronavirus pandemic has crushed the company’s prospects. Today, the stock is only worth $15. The rapid decline has caught the eye of value investors. Some analysts believe the share price could double in 2020.
Just be careful. Last week, executives released a bombshell revelation that should be heard by all investors, not just Air Canada shareholders.
Get ready for this
Airline investors have been wondering what to do. The stock of nearly every airline is down at least 50%. Some companies have seen their share prices decline by 80%. There has never been a better time to buy, many argue. But is that true?
The problem is that we have almost no clarity on what the future holds. When will the coronavirus pandemic subside? When will business and leisure travel return to normal? No one knows.
Uncertainty crushes the valuation of any stock it touches. In this case, it could ultimately lead to 100% downside. Many airliners are struggling to survive. Delta Air Lines is reportedly losing $50 million every day. Air Canada is almost certainly bleeding cash too.
Last month, the news hit that Warren Buffett could be exiting the industry entirely, even though he was a top shareholder of four different airlines at the start of the year.
What do Air Canada executives think? Last week, on the company’s first quarter conference call, we got our first glimpse.
“The pandemic and its fallout will materially impact both customer demand and our liquidity in the short and medium term,” management began. “Moreover, while the duration of the pandemic and its fallout remain unknown, it is our current expectation that it will take at least three years to recover to 2019 levels of revenue and capacity.”
Three years until a return to normal! But it gets worse.
“We expect that both the overall industry and our airline will be considerably smaller for some time, which will unfortunately result in significant reductions in both fleet and employee levels,” they concluded. Next quarter, the company will reduce its booking capacity by 85%.
Time to buy Air Canada?
I recently covered why airline stocks were such a great investment last decade. The cause was simple: industry consolidation. Decades ago, dozens of airlines competed over a single route. Today, only a few players compete in any given region. The U.S. is down to just four major carriers, while Canada only has two.
Whichever airlines can survive the current rout may eventually see brighter days. Lesser-financed competitors will exit the market. New entrants will be limited. These factors will boost profits for incumbents.
But the road to this bright future is unclear. According to Air Canada, it will take years. Over that time, emergency funding measures will be taken, and it’s unclear how that will happen. There are few buyers for costly assets like planes, and government bailouts will likely result in heavy share dilution.
It’s tempting to buy beaten-down airline stocks like Air Canada, but the uncertainty is just too high. That seems to be Warren Buffett’s conclusion as well.
The Motley Fool recommends Delta Air Lines.
Fool contributor Ryan Vanzo has no position in any stocks mentioned.
Profit falls at TD and CIBC as loan loss provisions soar – CBC.ca
Canadian Imperial Bank of Commerce (CIBC) and TD Bank Group missed quarterly earnings expectations on Thursday, as they set aside billions to cover future loan losses due to the COVID-19 outbreak.
The massive jump in provisions took the total amount set aside by Royal Bank of Canada, Bank of Montreal , Bank of Nova Scotia, National Bank of Canada , CIBC and TD Bank to $10.93 billion.
The money set aside for credit losses on both performing and impaired loans as a result of the COVID-19 pandemic and continued pressure on oil prices has added to pressure on Canada’s biggest lenders from decade-low interest rates.
Canadian banks have grown their oil and gas loan books faster than total lending in recent quarters, and their business loan books overall expanded during the second quarter as borrowers unable to access debt markets drew down credit lines.
CIBC posted an adjusted profit of 94 Canadian cents per share for the quarter ended April, compared with analysts’ expectations of $1.58 per share.
TD Bank, Canada’s second-biggest lender, reported an adjusted profit of 85 Canadian cents per share, missing estimates of 89 Canadian cents.
Net income was $1.5 billion at TD, down 52 per cent from last year. Net income was $392 million at CIBC, down 70 per cent from last year.
CIBC also reported lower net income across divisions and higher expenses. Controlling costs is particularly vital for CIBC, which has already said it expects expenses to grow this year at about double the rate of its rivals.
It flagged layoffs earlier this year to aid its efforts to cut costs and become more efficient.
CIBC set aside $1.41 billion in the quarter for future loan losses, compared with $255 million a year earlier, while total provisions for TD Bank jumped to $3.22 billion, compared with $633 million a year earlier.
Irving Oil Purchasing North Atlantic Refining Corp. – VOCM
A tentative deal has been struck for Irving Oil to take over North Atlantic Refining and the Come by Chance oil refinery.
Irving Oil signed the agreement with Silverpeak to acquire North Atlantic, subject to a regulatory review and the conditions of sale being met.
Silverpeak purchased the facility from the Korea National Oil Company back in 2017 amid widespread speculation that Irving was also eyeing the refinery at the time.
Operations at the refinery were idled in March due to a downturn in the industry and concerns around the COVID-19 pandemic.
The refinery shutdown came ahead of planned upgrades and expansion work that officials had indicated would extend the life of the facility.
New Brunswick-based Irving says North Atlantic Refining provides a “reliable supply of fuel products to businesses and consumers across Newfoundland.”
There’s no immediate word on Irving’s plans regarding a possible restart of operations at Come by Chance.
Irving signs purchase agreement for dormant Come by Chance oil refinery – CBC.ca
In another shakeup in the Newfoundland and Labrador oil sector, Irving Oil announced Thursday that it has reached an agreement to purchase the idled refinery at Come by Chance.
In a news release late Thursday morning, New Brunswick-based Irving confirmed it will acquire North Atlantic Refining Corp. from U.S. investment firm Silverpeak, with the deal subject to regulatory review and conditions of sale being met.
The agreement includes the refinery in Placentia Bay, which has the capacity to refine 135,000 barrels per day of oil, and North Atlantic’s network of retail sites and other marketing assets.
“As a family-owned international refining and marketing company based in Atlantic Canada, Irving Oil has proudly served the people of Newfoundland and Labrador since 1950, providing a secure supply of energy to its customers across the province,” states the news release.
The refinery stopped making fuels in March because of the pandemic, and a resulting collapse in the oil market. Hundreds of workers have been laid off.
A source tells CBC News that Irving plans to keep the refinery in “care and maintenance” mode for now.
It’s yet another chapter for a refinery that has had a checkered past since it opened in the 1970s, including five different owners, an extended closure and a political scandal at the outset.
But prior to the pandemic, the refinery was riding a wave of optimism, with performance and environmental upgrades, and plans for more.
“We are coming from what we call a basket-case refinery to become a refinery of the future,” Thomas Jenke, former CEO at North Atlantic, said prior to his departure late last year.
If approved, the deal will represent another large investment by the Irving family in Newfoundland and Labrador.
Irving Oil Limited is already a powerful player in the retail gasoline market, with a chain of gas stations and restaurants, including its iconic Big Stops. J.D. Irving Limited operates a chain of Kent home improvement stores in the province, and owns Atlantic Towing, a company that operates a fleet of supply vessels in Newfoundland and Labrador’s offshore oil sector.
Meanwhile, North Atlantic provides fuel products to businesses and consumers across the province, and is a major contributor to the province’s economy, with some estimates putting its value to the gross domestic product at three per cent.
It has a deepwater terminal that welcomes oil tankers from around the globe, and a network of retail assets.
“Irving Oil would look forward to the opportunity to continue to provide a secure supply of energy to customers across the province,” says the press release.
Most workers at the refinery are represented by Local 9316 of the United Steelworkers. CBC has requested comment from union president Glenn Nolan.
This is not new territory for Irving. The company operates Canada’s largest oil refinery, in Saint John.
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