The Russia-Ukraine war shifted investors’ attention to oil stocks. The supply shocks due to the ban on Russian oil spiked oil prices and made travel an expensive affair. To add to this, Russia banned Canadian flights from using Russian airspace. Air Canada saw a dip in its air passenger traffic to India, as it had to take a longer route for its flights to Asia Pacific.
Despite these challenges, Air Canada (TSX:AC) saw a remarkable recovery in revenue, free cash flow, and profit, as overall passenger traffic improved.
Don’t forget Air Canada’s stock
The airline, which accumulated $7.5 billion in net debt during the pandemic lockdown, reduced it to $5.3 billion in the second quarter. Improving fundamentals sent the stock up 40% from $18.17 in March to $25.7 in July.
However, Air Canada stock has once again slumped to the $18 range ahead of the third-quarter earnings on September 28. The weakening economy has started to slow consumer demand. The overall market has plunged since August over fears of a recession. Many economists believe that a recession is imminent. Early signs of a recession are already visible; banks have increased credit risk, high-debt companies have cut dividends, and consumer demand has plunged.
But if a recession is averted, Air Canada stock could take off to its higher range of $24. The airline is a range-bound stock, hovering between $15 and $25. It sees resistance at $25 because of the significant debt on its balance sheet and the equity capital it raised during the pandemic. Both activities have diluted shareholder interest, preventing the stock from crossing the $25 mark.
However, AC stock finds support at $15, its pandemic low. The $15 price supports the revenue and capital of Canada’s largest national airline. The airline has come far from bankruptcy fears and is now on a growth trajectory.
From this point, air traffic could normalize or decline ahead of a recession. Investors have already priced these fears in the stock. Now is an apt time to buy this range-bound stock, because more gains are coming for the airline.
More gains could be coming for Air Canada
The airline industry could see a slowing demand in the short term, as the economy weakens. However, Air Canada is in a much better position to handle a recession than last time. It has $1.95 billion in free cash flow and has significantly improved its efficiency.
| Air Canada’s fundamentals | 2018 | 2019 | 2022 | H1 2023 |
| Revenue | $18 billion | $19.13 billion | $16.56 billion | $10.31 billion |
| Net Income | $37 million | $1.47 billion | ($1.7 billion) | $842 million |
| Net Debt | $5.2 billion | $2.84 billion | $7.5 billion | $5.33 billion |
| Free Cash Flow | $1.32 billion | $2.07 billion | $796 million | $1.95 billion |
Air Canada stock is trading at 5.46 times its forward earnings per share, which might look expensive for a company with dwindling profits. A recession could keep the airline stock around $20 for two years. But an economic recovery could push the airline stock up 25%. And if the economic woes are over, it could return to a longer-term 12-18 months growth trajectory, in which it could surge 80-100%. Air Canada stock showed such a recovery rally in 2019 after the 2018 United States-China trade war.
Other investment options where more gains could be coming
If Air Canada is too risky an investment, there are other opportunistic stocks that could see immediate gains in the upcoming economic uncertainty.
One commodity that continues to remain a hedge against inflation is gold. Barrick Gold (TSX:ABX) is one of the biggest gold miners and pays marginal dividends. If a recession materializes, the stock market will plunge and pull down Barrick Gold stock. But the stock will rally after a dip as gold is considered a safe-haven asset class where investors put their money in troubled times.
The best time to invest in Barrick Gold is when it trades at normal levels of around $20 and when it withdraws on market shocks. Invest only a small portion, as the stock doesn’t appreciate much in a growing economy. It only outperforms in a weak economy.
