Why Air Canada (TSX:AC) Stock Is a Better Recovery Play Than Cineplex (TSX:CGX)

Cineplex (TSX:CGX) stock is currently trading close to its all-time lows, while Air Canada (TSX:AC) is trading close to its near-term support levels of $15.

| More on:

We might see an outbreak of bankruptcies next year, driven by the prolonged pandemic. Things are already getting uglier amid the second wave of the coronavirus.

Air Canada stock versus Cineplex

Consumer discretionary sectors like airlines and entertainment are some of the worst-hit areas. The theatre stock Cineplex (TSX:CGX) recently broke all support levels and is currently trading close to its all-time lows of $5. At the same time, the country’s biggest airline company, Air Canada (TSX:AC) stock, is trading close to its near-term support levels of $15.

While Canada has seen a stable economic recovery in the last few months, it has largely been uneven. Travel restrictions have significantly hampered airline companies, while theatres are operating with capacity constraints.

Cineplex reported a massive 95% decline in its top line amid the theatre closures during the second quarter. It reported a $99 million loss in the same quarter. Along with recurring losses, Cineplex investors must be concerned with the surrounding uncertainties.

The return of movie-goers is of utmost importance for Cineplex to stop it bleeding, which seems unlikely in the short term. Its debt has also increased substantially in the last few years. To add to the woes, liquidity is another major issue for Cineplex, and weaker demand for longer might force the company to go bankrupt.

Air Canada’s stronger liquidity position

However, things are different at Air Canada. Air Canada has also been operating at trivial capacities for the last six months. But importantly, the airline is in a position to survive longer in this dreadful scenario. It has a strong liquidity position, which can take care of its cash burn.

Air Canada reported a revenue drop as steep as 90% in the second quarter. It has lost $2.8 billion so far this year. However, the company has seen crises before and has emerged strongly from each one. Its operational efficiency and robust financial position will likely fuel a great recovery. A controlling market share should also play an important role in Air Canada’s upturn.

Air Canada and Cineplex are expected to report their third-quarter earnings on November 10-11. Besides the impact on their bottom lines, how their managements see things for next year will matter more.

A sooner-than-expected vaccine launch could be a game-changer for both Cineplex and Air Canada. At the same time, government aid could notably improve their prospects.

The Foolish takeaway

After their recent weakness, these stocks look discounted. However, that could be a value trap, and cautious investors might choose to stay away, given the underlying uncertainties. Novice investors might follow these risky plays given their attractive gain prospects based on price targets. However, consensus price targets are least useful when there are so many improbabilities.

I am optimistic about Air Canada, mainly because of the above-mentioned reasons. Canada might ease its air travel restrictions in late Q4, which will start aviation’s recovery. As Air Canada starts operating with relatively higher capacity, it will lower the cash burn and will boost the stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

More on Stocks for Beginners

construction workers talk on the job site
Energy Stocks

Best Stock to Buy Right Now: Baytex vs Suncor?

Suncor and Baytex stocks both look like solid companies offering growth and dividends. But which is the better buy?

Read more »

profit rises over time
Top TSX Stocks

3 Reasons to Buy Enbridge Like There’s No Tomorrow

Have you considered buying Enbridge (TSX:ENB)? Here are 3 reasons to buy Enbridge today for lasting growth and income.

Read more »

An investor uses a tablet
Stocks for Beginners

If I Could Only Buy 2 Stocks in the Last Half of 2024, I’d Pick These

I’m looking to buy two stocks over the next month. Here’s a look at my picks and why you should…

Read more »

dividends grow over time
Stocks for Beginners

The Smartest Growth Stock to Buy With $2,000 Right Now

Do you have $2,000 to invest for the long term? These three TSX stocks have and will continue to deliver…

Read more »

The virtual button with the letters AI in a circle hovering above a keyboard, about to be clicked by a cursor.
Tech Stocks

Is OpenText Stock a Buy, Sell, or Hold for 2025?

OpenText stock has fallen in the last few years, but that could mean this top tech stock remains an undervalued…

Read more »

man touches brain to show a good idea
Dividend Stocks

3 No-Brainer REIT Stocks to Buy Right Now for Less Than $200

REITs have long been touted as some of the best dividend stocks out there if you want recurring, strong income.…

Read more »

grow money, wealth build
Dividend Stocks

3 Top High-Yield Stocks to Buy in November

If you want passive income, high yield dividend stocks are the clear choice. These are the best, and safest, out…

Read more »

Stocks for Beginners

Where will Loblaw Stock be in 5 Years?

Want a great food stock that can provide growth and income? Here's why Loblaw stock can offer that and more.

Read more »