Air Canada (TSX:AC) was among the best-performing TSX stocks in the decade prior to COVID-19. As interest rates were low and fuel prices were rangebound, Air Canada benefitted from an elongated period of global economic expansion. Between January 2010 and January 2020, AC stock surged by a whopping 3,690%, dwarfing the 94% gains of the TSX index by a wide margin.
Air Canada is the largest airline and the largest provider of scheduled passenger services in Canada. It was among the top 20 largest airlines in the world in 2019 and is currently valued at $6.5 billion by market cap.
However, as countries imposed lockdowns at the onset of the COVID-19 pandemic, the travel industry was among the hardest hit globally. In addition to travel shutdowns and falling revenue, Air Canada and its peers increased balance sheet debt to offset their cash burn rates, as airline companies are capital intensive.
As lockdown restrictions were relaxed, the global travel market experienced robust demand. But rising inflation also meant that fuel prices ballooned to multi-year highs in 2022, dragging the profit margins of airline stocks lower.
Down 65% from record highs, let’s see if Air Canada stock is a good buy right now.
Air Canada stock is undervalued
Air Canada reported record sales of $19.13 billion in 2019. But it is forecast to end 2023 with revenue of $21.1 billion, an increase of over 10% compared to 2019. The airline giant is also forecast to swing to a profit of $5 per share in 2023, compared to a loss of $2.76 per share in 2022. So, priced at 0.30 times forward sales and 3.6 times forward earnings, Air Canada stock is quite cheap.
In the first nine months of 2023, the company reported adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of $3.46 billion, indicating a margin of over 20%. It also reported a free cash flow of $2.08 billion in the last three quarters, providing it with enough room to make interest payments, lower balance sheet debt, and reinvest in capital expenditures.
Air Canada ended the third quarter (Q3) with a total debt of $14.4 billion and $8.3 billion in cash. Its net debt has reduced to $5.43 billion in Q3 from $7.82 billion in the year-ago period. Air Canada’s net-debt-to-adjusted EBITDA ratio has fallen to 1.4 in Q3 from 5.1 at the end of 2022 due to improving profit margins and a decline in net debt levels.
Is Air Canada a good stock to buy right now?
Air Canada is focused on improving its liquidity position to get through an uncertain global economy. It ended the September quarter with almost $10 billion in total liquidity, including cash, investments, and undrawn credit facilities.
In the next 12 months, Air Canada aims to meet its liquidity requirements with operating cash flow and available cash in hand. However, the company also emphasized, “Liquidity needs related to obligations associated with financial liabilities and capital commitments, may also be supported through new financing arrangements.”
Analysts remain bullish on Air Canada stock. Out of the 16 analysts tracking AC stock, 13 recommend “buy,” and three recommend “hold.” The average target price for AC stock is $29.9, indicating an upside potential of over 55%.
