Author: Scott Deveau

While investors will likely see airport closers across Europe as a one-off event for airlines, Air Canada is still expected to be losing millions of dollars a day while its flights to Europe are grounded.

The International Air Transport Association, which represents 240 of the world’s largest airlines, has said airlines globally stand to lose US$200-million a day due to the cancelled flights across Europe this past week since the volcanic eruption in Iceland.

Air Canada’s flights to London, Paris, Frankfurt, Munich, Zurich, Geneva, Rome and Tel Aviv have all been affected over the past five days due to ash from the volcano. 

“While we expect investors to look past this issue if it is only short-term and one-time in nature, we roughly estimate that [Air Canada] and [AMR Corp, the parent of American Airlines,] may each lose US$10-million [a day] in revenue and US$5-million [a day] in income while the airspace is closed,” said Will Randow, Citigroup Investment Research analyst, in a note to clients.

“We expect further color from management teams this week," he added.

British officials said Monday they expect flights to the U.K. to be disrupted until at least 1 a.m. Tuesday morning.

Scott Deveau

It appears that those green shoots emerging in the Canadian rail sector in recent months are now in full bloom. But the transition has not gone unnoticed by investors, according to Steven Hansen, Raymond James analyst.

“Weekly volumes are not only improving, but also surging to fairly robust levels—in some cases recovering to pre‐recession levels,” Mr. Hansen said in a note to clients Thursday.

In the first 13 weeks of 2010, Canadian and North American carload originations swelled 12.5% and 6.7% respectively, he noted. At Canadian National Railway Co. carload volumes have increased 14.6% during the first quarter compared to last year, while its smaller rival, Canadian Pacific Railway Ltd., has seen growth of 9.1% in its carloads.

“We believe it is fair to say that the recovery has safely advanced from a fragile, nascent state, to one of reasonable health and vigour,” Mr. Hansen said.

He upgraded his earnings estimates on both CN and CP accordingly. But cautioned that the recovery hasn’t gone unnoticed with both stocks experiencing run-ups in their shares as volumes returned.

Mr. Hansen increased his price target for CP to $68 a share, compared to $65 previously, and maintained his “outperform” rating.

But while he also increased his price target for CN to $67, from $64.50 previously, he downgraded it to a “market perform” due to the recent appreciation of its shares.

Both CN and CP will report their first quarter results in two weeks.

Scott Deveau

With both Boeing Co. and Airbus SAS recently announcing production increases and passenger traffic improving, the outlook for the aerospace industry is looking a little rosier this year than it was a year ago.

“In our opinion, these rate increase announcements by the two leading aircraft OEMs are the strongest signal yet of a rebound in the commercial aerospace sector,” said Cameron Doerksen, Versant Partners analyst, in a note to clients Wednesday.

The offshoot in Canada will be that several aerospace companies, including CAE Inc., the world’s largest manufacturer of full-flight simulators, stand to benefit as well as the industry recovers, he said.

Simulator sales are closely tied to new aircraft orders, so the more new planes that are ordered by airlines, the more simulators and training services are required.

While CAE has forecast 20 simulator sales this current fiscal year, when it reports its year-end results next month, Mr. Doerksen said he expects a “modest increase” to next year’s sales forecast.

While the strong Canadian dollar is expected to shave a cent of his previous earnings per share estimate for the current fiscal year to 64¢, he introduced his new EPS estimate for next fiscal year of 73¢.

Mr. Doerksen said he believes CAE’s peak earnings might exceed 90¢ a share this cycle compared to 79¢ in the last peak when shares were trading at over $15 a piece on the Toronto Stock Exchange.

“We
believe the market will be willing to pay a premium multiple for stocks
such as CAE that are positioned to benefit from the aerospace
up-cycle,” Mr. Doerksen said.

He reiterated his ‘buy’ rating for CAE, and raised his price target on the stock to $12.50 a share, compared to his previous estimate of $10.

Scott Deveau

Shares in Quebec aerospace parts maker Héroux-Devtek Inc. are expected to spike Friday after it announced earlier this week it would acquire Ohio-based Eagle Tool & Machine and Co.

While the transaction is relatively small at US$34-million, the news has made an already bullish Street even more so on the stock, which is quickly becoming the darling of the aerospace sector.

The deal is expected to improve Heroux’s earnings per share by 10% this year, or by roughly 5¢ a share, and add US$125-million worth of work to its backlog, a 30% increase.

“We were already bullish on [Heroux’s] prospects, especially in-light of the emerging recovery in commercial aerospace markets,” said Cameron Doerksen, Versant Partners analyst, in a note to clients. “This highly strategic acquisition reinforces
our positive view. We also believe that the acquisition could spark renewed investor interest in the stock.”

He raised reiterated his “buy” rating, but raised his price target on the stock to $8.80 a share from $8 previously.

Likewise, Ben Cherniavsky, Raymond James analyst, raised Heroux from an “outperform” to a “strong buy” on the news, and increased his price target to $7 a share from $6 previously.

Benoit Poirier, Desjardins Securities analyst, raised his price target to $8 a share from $6.50 previously, in part because of the acquisition, but also as he rolled his target forward. He also reiterated his “buy” rating.

Mr. Poirier said he anticipates the deal, which is expected to close April 30, will be financed with Heroux's existing cash, which was roughly $30-million, and its current credit facility.

But notes it comes with an added bonus of occurring when the Canadian dollar has increased considerably against the greenback.

Heroux is a supplier of components for commercial and military aircraft, as well as the power generation market. It is the third-largest manufacturer of landing gear in the world.

Shares in the company closed Thursday at $5.66 on the Toronto Stock Exchange following a 5.8% jump on the news of the acquisition. 

Scott Deveau

The recent pullback in the valuation of Bombardier Inc. has led the Montreal manufacturer being raise to a “buy” late Tuesday at UBS.

Shares in the plane and train maker have fallen 12% since a disappointing fourth-quarter result last week and news that further production cuts for its regional jets may be a possibility in the weeks ahead.

However, Tasneem Azim, UBS analyst, notes that the shares now carry the potential of a 19% upside to her one year price target of $6.50 a share.

“We believe valuation has pulled back  sufficiently to warrant our upgrade of the shares,” she said in a note to clients.

Ms. Azim said the valuation may be still negatively impacted in the near term due to a weaker-than-expected outlook.

But over the next 12 to 18 months, she said the shares offer an attractive risk-reward due to the anticipated gradual recovery of the business jet market and greater profitability in its train division.

Scott Deveau

Canadian airlines have been steadily raising fares as passenger demand returns. But the question remains whether those increases will stick with competition heating up in the domestic market later  this spring, said Ben Cherniavsky, Raymond James analyst.

Fares at both Air Canada and WestJet Airlines Ltd. have increased 17% and 22% respectively compared to last year, according to Raymond James’ monthly air fare survey.

The only notable exception was a $29 fare offered by WestJet on a Toronto-Montreal route compared to $79 last year, which Mr. Cherniasky said is consistent with his belief that Porter Airlines was having a disruptive effect in the so-called Eastern Triangle between Toronto, Montreal and Ottawa.

While Mr. Cherniavksy conceded that the increases fly in the face of his assumption that domestic yields will remain under pressure in 2010, he said it was premature to say whether they would stick.

“Today’s more impecunious fliers may get sticker shock and force fares back down,” he said.

The true test will come in late spring and summer when WestJet moves the bulk of its capacity back into the domestic market out of the Caribbean and Mexico, he noted.

Mr. Cherniavsky reiterated his preference for Air Canada shares over WestJet due to its greater exposure to international routes, business travelers, and cargo – all of which he is convinced are undergoing a recovery.

He also raised his price target on Air Canada to  $3.50 share from $2.25 previously, and held WestJet’s at $13.50, accordingly.

David Newman, National Bank Financial analyst, also raised Air Canada to an "outperform" Wednesday, and raised his price target to $3.50 a share, from $1.75 previously, with the potential for a greater upside in the second half of the year and ongoing cost-cutting efforts.

At the same time, Air Canada will likely see some pricing pressure this spring with Porter plotting an aggressive expansion in the Eastern Triangle, said Cameron Doerksen, Versant Partners analyst.

“This is a significant increase in capacity on already well served routes, which is bound to put downward pressure on air fares,” he said in a note to clients. “Given that Air Canada has more capacity committed to these routes, we would expect it to be more impacted than WestJet from Porter’s expansion.”

Unlike Mr. Cherniavsky, Mr. Doerksen prefers WestJet, which he has a “buy” rating on, to Air Canada, which he has a “neutral” rating on.

He has a $1.60 a share price target on Air Canada and $17 price target on WestJet because improved unit revenue this year from the higher fares will likely drive WestJet's stock higher in the coming months.

Scott Deveau