Investors are always trying to look for an edge and find high-potential stocks that are trading well below their fair value. So, with Air Canada (TSX:AC) stock trading around $16.50 a share and well below its pre-pandemic price of roughly $50 a share, it looks like it could offer an excellent opportunity.
Investors have been watching and buying Air Canada since the pandemic started. However, for the first year and a half, travel was still heavily impacted by the pandemic.
Now, though, as many pandemic restrictions and rules have been dropped, and there is so much pent-up demand from consumers to travel, Air Canada has an excellent opportunity to start to finally turn its business around.
However, with several major challenges that the industry is facing right now, such as surging fuel prices, shortages of staff, and tonnes of flight cancellations, it could take even longer for Air Canada stock to rebound the way investors expect it to.
So, can the stock earn a profit in the second half of 2022? And is it worth a buy now?
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Can Air Canada stock earn a profit in the second half of 2022?
So far, Air Canada has only posted earnings for the first quarter of 2022, with its second-quarter numbers scheduled to come out on August 2.
In the first quarter, the stock saw over $2.5 billion in revenue — a more than 250% jump year over year. And while that was a significant recovery, $2.5 billion in revenue is still well off the $4.5 billion in revenue it did in the first quarter of 2019 before the pandemic hit.
It’s also worth pointing out that on that $2.5 billion in revenue from last quarter, Air Canada stock actually earned negative EBITDA of $143 million and lost over $900 million, or $2.54 in earnings per share, on the bottom line.
With that being said, though, analysts expect it to continue gaining momentum through the year. In fact, over the next three quarters, its revenue is expected to grow to just under $4 billion in the second quarter before jumping again to more than $5 billion in revenue in the third quarter. In the fourth quarter, analysts estimate roughly $4.5 billion in sales.
Recovering its business and starting a turnaround is crucial for Air Canada. However, with so many headwinds impacting its business, even with a strong recovery in sales, it could still be some time before Air Canada stock is profitable.
Even with analysts expecting rapid improvement in sales, the stock is still only expected by analysts to earn a profit in the third quarter of roughly $130 million, or $0.48 a share.
This profitability is what many investors have been waiting for. But with Air Canada stock still expected to lose money for the year, is the stock worth a buy today?
Should you buy the airliner today?
Despite a recovery beginning for Air Canada stock, it’s still extremely expensive, faces severe headwinds, and isn’t expected to start consistently making a profit until next year.
Furthermore, even if you’re looking at next year’s estimated earnings, which are expected to be $1.01 by analysts, the stock is still trading at a forward price-to-earnings ratio of more than 16 times, which is certainly expensive for a stock like Air Canada that’s full of risk.
Moreover, while Air Canada’s share price may seem much cheaper than it was prior to the pandemic, because the stock has had to take on so much debt, its enterprise value of $13.6 billion today is still only about 15% below its pre-pandemic enterprise value of $16.3 billion.
Therefore, until Air Canada stock can get cheaper, or its operations can improve more meaningfully, there are far better options for investors to find value in this market.
