Citi arrives at its C$23/share target price for Air Canada by using a ~8.25x forward earnings multiple on 2026E EPS. This target is ca. 10% below our target valuations for the US big three. Although Air Canada appears to have very similar opportunities, Canadian dollar trends and somewhat lower FCF generation at least somewhat reduce Air Canada's comparability with its US peers, on a fundamental basis.

This stock would be High Risk based upon our quantitative model but assigning a High Risk rating is not supported by other qualitative factors such as last January’s incorporation of the cash-generating Aeroplan loyalty program subsidiary, which materially improved its margins and leverage. Therefore, a High Risk rating has not been applied.

Key risks to achieving our target price faced by Air Canada include:

Continued traffic shocks: If air passenger volumes remain depressed due to COVID-19, or other potential disease outbreaks, acts of terrorism, or natural events such as storms or volcanic eruptions, our earnings estimates and target price for AC shares may prove to be too high.

Economic: Macroeconomic weakness in Air Canada's key markets would be likely to drive actual earnings below our expectations. The carrier's revenue is highly cyclical and a shallow demand recovery following the April/May passenger demand lows would likely lead to lower revenue than we expect. 

Corporate demand: If the decline in corporate travel demand proves to be more secular in nature, Air Canada's revenue would likely not grow as quickly as we expect in 2022. 

Faster resolution to COVID-19: If vaccines are administered faster than we currently expect, our earnings projections could prove to be too low.

If the impact on the company from any of these factors proves to be more negative than we anticipate, the stock will likely have difficulty achieving our financial and price targets. Likewise, if any of these factors proves to have less of an effect than we anticipate, the stock could materially outperform our target.