Canada's Transat: A Play on the Rising Loonie?

Transat A.T. (TRZAF.PK) is Canada’s largest travel tour operator. It stands to benefit from a higher Canadian dollar (which makes trips to foreign destinations cheaper, thereby increasing demand for travel/vacation packages outside of the country).

In 2007, when the loonie went above parity to the U.S. dollar, Transat’s stock traded as high as $40, and never was less than $30. Today, as the loonie climbs to within hailing distance of parity, Transat’s stock price is near $13.

The travel industry has been hit hard by consumers cutting back on vacation spending during the recession. Moreover, the industry has been wrestling with an overcapacity problem that has spawned a price war.

Analysts say Transat is large enough to withstand the vicissitudes. It may not happen overnight but economic recovery will eventually boost consumer income, while exits from the industry by weaker rivals will trim capacity and leave more of the market for the remaining companies. And Transat has undertaken corporate restructurings that have lowered its costs.

Also, according to a recent report by RBC Capital Markets analyst Tanya Messinger, Transat has a:

• strong balance sheet and over $200-million of unrestricted cash, and
• high forecasted free-cash flow generation (which will allow it to quickly pay down debt)

Near term, however, there could be a bit of turbulence. Ms. Messinger notes competitors are still adding capacity. And swine flu may again rear its head.