The Group Aeroplan issued Q2 2010 financial results above expectations. The operating profit (adjusted EBITDA) rose by 10% and all business units contributed to this growth. These good results contrast with the current discourse of the financial media who seem terrified by the “jobless recovery” and the return of the recession.
Aeroplan is a loyalty program manager with a strong geographic diversification (Canada, United Kingdom, United States, Italy and Middle East). The company has many partners very sensitive to the state of the economy such as CIBC and American Express in Canada or HomeSense in United Kingdom. Business travelers are also major users of the program in Canada. I think Group Aeroplan can be seen as an interesting indicator of the mood of consumers and businesses. Last quarter profit growth and optimism expressed by the company management contradict the theory of a relapse of the economy.
In my opinion, Aeroplan is one of the most underrated stock among Canadian mid-cap. The company generates significant free cash flow and its business model requires little capital expenditure. It is becoming established as the world’s leading loyalty program. In addition, the company pays a safe dividend of 4% and buy back its shares massively.
The misunderstanding of its business model and fears for its reliance on Air Canada are probably two reasons for skepticism about Aeroplan.
As for its business model, Aeroplan sells milles to its various partners. They then distribute them to their customers. Eventually, these customers go back to Aeroplan to redeem their miles (to get an airfare, iPod, etc..). Aeroplan thus receives income before having to provide an actual product. It is a model similar to insurance companies who collect insurance premiums first and pay compensation (if needed) in a more or less near future. However, the Aeroplan model is much less risky because of the fixed value of Aeroplan miles (contrary to the compensation paid by insurance companies whose extent is unpredictable).
Air Canada is an airline that has had its share of financial troubles in the last decade. These problems gave umbrage to Aeroplan. However, you should know that the percentage of Aeroplan income coming from Air Canada has declined significantly due to the expansion of the loyalty program. In 2007, Air Canada accounted for 25% of the group 950 million income. In 2010, it is only 12% of the two billion projected income that will come from Air Canada.
In short, Aeroplan is a a bit of a unloved and neglected stock that could rebound in a big way during an economic recovery.
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