What is AC.TO's Intrinsic value?

Air Canada (AC.TO) Intrinsic Value Analysis

Executive Summary

As of May 25, 2025, Air Canada's estimated intrinsic value ranges from $53.05 to $198.56 per share, depending on the valuation methodology applied.

Valuation Method Fair Value (USD) Implied Upside/Downside
Discounted Cash Flow (10Y) $107.33 +472.7%
Discounted Cash Flow (5Y) $63.42 +238.4%
Dividend Discount Model (Multi-Stage) $53.05 +183.1%
Dividend Discount Model (Stable) $102.38 +446.3%
Earnings Power Value $198.56 +959.5%

Is Air Canada (AC.TO) undervalued or overvalued?

With the current market price at $18.74, the stock appears to be significantly undervalued.

Understanding Intrinsic Value

Intrinsic value represents the "true" worth of a company based on its fundamentals rather than market sentiment. We've employed multiple methodologies to triangulate Air Canada's intrinsic value, including:

  1. Discounted Cash Flow (DCF): Values the company based on projected future cash flows
  2. Dividend Discount Model (DDM): Values the company based on expected future dividend payments
  3. Earnings Power Value (EPV): Values the company based on its current earnings power, assuming no growth

Weighted Average Cost of Capital (WACC)

The cost of capital is a critical factor in valuation models, representing the required return for investors.

WACC Component Low High
Long-term bond rate 3.2% 3.7%
Equity market risk premium 5.1% 6.1%
Adjusted beta 0.54 0.89
Cost of equity 5.9% 9.6%
Cost of debt 4.7% 8.4%
Tax rate 7.4% 10.3%
Debt/Equity ratio 2.09 2.09
After-tax WACC 4.9% 8.2%

Valuation Methods

1. Discounted Cash Flow (DCF) Valuation

Our DCF model projects cash flows over 5-year and 10-year horizons, with the following key assumptions:

  • Forecast Period: 5-year DCF and 10-year DCF
  • Terminal Growth Rate: 0.0% (range: 3.0% - 5.0%)
  • Discount Rate: 6.5% (range: 0.0% - 9.3%)

Key Projections:

  • Revenue growth from $22,255 (FY12-2024) to $40,677 (FY12-2034)
  • Net profit margin expansion from 8% to 5%
  • Capital expenditures maintained at approximately 13% of revenue
DCF Model Fair Value Enterprise Value % from Terminal Value
5-Year Growth $63 $29,832M 85.0%
10-Year Growth $107 $44,002M 72.4%
5-Year EBITDA $59 $28,283M 84.2%
10-Year EBITDA $87 $37,461M 67.5%

2. Dividend Discount Model (DDM)

The DDM values a company based on its expected future dividend payments. We used two approaches:

Multi-Stage DDM:

  • Current payout ratio: 0.0%
  • Stable payout ratio: 90.0%
  • Growth transition: 5 years
  • Cost of equity: 7.8%
  • Long-term growth rate: 2.0%
  • Fair value: $53.05 (183.1% from current price)

Stable DDM:

  • Stable payout ratio: 70% (Low) to 90% (High)
  • Cost of equity: 9.6% (Low) to 5.9% (High)
  • Long-term growth rate: 1.0% (Low) to 3.0% (High)
  • Fair value range: $43 to $162
  • Selected fair value: $102.38 (446.3% from current price)

3. Earnings Power Value (EPV)

EPV assesses a company's value based on its current normalized earnings power, assuming no growth.

EPV Component Value
Normalized Earnings $4,498M
Discount Rate (WACC) 8.2% - 4.9%
Enterprise Value $54,860M - $92,029M
Net Debt $9,365M
Equity Value $45,495M - $82,664M
Outstanding Shares 323M
Fair Value $141 - $256
Selected Fair Value $198.56

Key Financial Metrics

Metric Value
Market Capitalization $6048M
Enterprise Value $15413M
Trailing P/E 3.56
Forward P/E 9.75
Trailing EV/EBITDA 5.80
Current Dividend Yield 0.00%
Dividend Growth Rate (5Y) 0.00%
Debt-to-Equity Ratio 2.09

Investment Decision Framework

To determine the most reliable intrinsic value estimate, we weigh each valuation method based on:

  1. Forecast Certainty: DCF methods rely on long-term projections, while earnings power value focuses on current normalized earnings
  2. Business Model Alignment: Dividend models are more appropriate for mature companies with established dividend policies
  3. Historical Accuracy: How well each method has predicted fair value historically

Valuation Weight Matrix

Valuation Method Weight Weighted Value
Discounted Cash Flow (10Y) 30% $32.20
Discounted Cash Flow (5Y) 25% $15.85
Dividend Discount Model (Multi-Stage) 20% $10.61
Dividend Discount Model (Stable) 15% $15.36
Earnings Power Value 10% $19.86
Weighted Average 100% $93.87

Investment Conclusion

Based on our comprehensive valuation analysis, Air Canada's weighted average intrinsic value is $93.87, which is approximately 400.9% above the current market price of $18.74.

Key investment considerations:

  • Strong projected earnings growth (8% to 5% margin)
  • Consistent cash flow generation

Given these factors, we believe Air Canada is currently significantly undervalued with the potential for long-term appreciation based on the company's growth trajectory and financial strength.