Should You Buy Air Canada Stock for Your TFSA?

Air Canada stock has only gotten cheaper in recent weeks, but even as it’s now recovering from the pandemic, is it worth a buy in your TFSA?

| More on:

For over a year now, ever since the initial impacts of the pandemic began to diminish and vaccination rates were improving, investors have had a tonne of hope for Air Canada (TSX:AC) stock. Yet even this year, with the stock now showing a noticeable improvement in its operations, the share price has hardly budged and it’s actually lower than where it was this time last year.

air canada stock

Investors may be wondering why Air Canada stock continues to trade at such a low price compared to where it was pre-pandemic and if that means it’s worth buying in their TFSA today.

Should you buy Air Canada for your TFSA?

If you’re looking at buying Air Canada stock as a long-term investment, thinking it’s a dominant company in an industry with tonnes of long-term potential, then you’re on the right track.

Any stock you consider buying in your TFSA, you should make sure you plan to own for the long haul. Speculating is far too risky, especially in an account like a TFSA, where investors’ contributions are limited.

In the case of Air Canada stock, though, while it certainly looks cheap, in reality, it’s not quite as undervalued. And while you can certainly argue it has tonnes of potential and room to recover in the coming years, in my view, it has a long way to go before the stock can begin to rally consistently.

Why hasn’t Air Canada stock recovered yet?

The fact that Air Canada stock hasn’t managed to recover yet, and that it’s actually lower today than where it was a year ago is not that surprising. First off, at around $25 a share, Air Canada has already been fairly valued for some time, if not overvalued.

With all the debt it had to take on during the pandemic and the new shares it had to issue, its pre-pandemic price of $50 a share is essentially irrelevant now. Today, Air Canada’s enterprise value (EV) of roughly $15.5 billion is just 5% below its EV of $16.3 billion at the end of 2019, right before the pandemic. So, while it may look cheap, it’s, at best, fairly valued.

And now, as uncertainty has picked up in markets, and Air Canada faces new headwinds such as rising fuel costs, it’s understandable that the stock continues to struggle.

Instead, another recovery stock that’s been popular among investors over the last year, Cineplex (TSX:CGX), could be a much better stock to buy for your TFSA.

Cineplex stock offers great value for long-term investors

One of the reasons that Cineplex could offer more potential than Air Canada is that although its operations were impacted quite severely too, it didn’t have to take on nearly as much debt. In addition, Cineplex didn’t have to dilute shareholders.

So, now, as its locations are all opening back up, and it’s seeing a recovery in its operations, just like Air Canada, it has the potential to rally much quicker and with fewer financial headwinds.

Right now, neither stock is expected to be profitable this year (although Cineplex is estimated to nearly break even). However, even if you take the estimated earnings from each stock in 2023, Cineplex trades at a forward price-to-earnings ratio of 11.6 times compared to Air Canada stock trading at 13.9 times.

That’s not all, though. Looking at their EVs to 2022 estimated EBITDA, Cineplex trades at a ratio of 6.3 times. Meanwhile, Air Canada stock is trading at an EV-to-EBITDA ratio of 9.9 times.

Therefore, considering Cineplex stock is facing fewer headwinds in the short term and is actually cheaper than Air Canada stock when comparing their forward earnings estimates, it’s a much better stock to buy for your TFSA today.

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 Daniel Da Costa has no position in any of the stocks mentioned. The Motley Fool recommends CINEPLEX INC.

More on Investing

Canadian dollars are printed
Dividend Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Toronto-Dominion Bank (TSX:TD) stock could do well in the year ahead.

Read more »

monthly desk calendar
Dividend Stocks

Monthly Income: Top Dividend Stocks to Buy in November

Here are two of the best monthly dividend stocks in Canada you can buy in November 2024 and hold for…

Read more »

hand stacks coins
Investing

A Top TSX Stock to Buy Now for Real Wealth Later

Intact Financial (TSX:IFC) stock is a fantastic dividend-growth play for the next 15 years and beyond.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Thursday, November 14

The U.S. wholesale inflation data and Fed chair Jerome Powell’s remarks about the economy will remain on TSX investors’ radar…

Read more »

Man data analyze
Tech Stocks

3 Reasons Celestica Stock Is a Screaming Buy Now

These three reasons make Celestica stock a screaming buy for long-term investors.

Read more »

profit rises over time
Dividend Stocks

These 2 Dow Stocks Are Set to Soar in 2025 and Beyond

Two Dow Jones stocks are screaming buys but Canadians must hold them in an RRSP or RRIF to avoid paying…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

How to Use Your TFSA to Earn Ultimate Passive Income

If you have a TFSA, then you have the key to creating ultimate passive income. All you need is a…

Read more »

Confused person shrugging
Dividend Stocks

Better Buy: Fortis Stock or Hydro One Stock?

Let's do a compare and contrast of these two top utilities stocks right now, shall we?

Read more »