As governments around the world have relaxed travel restrictions with the end of the pandemic, airline stocks appeared poised to take flight again. However, certain airline stocks like Air Canada (TSX:AC) have a stock price graph that is far from the “up-and-to-the-right” graph many expected.
In fact, since hitting pandemic lows, Air Canada stock has pretty much traded in a sideways band for the past couple of years. At less than $18 per share, AC stock now looks as though the market is pricing in some sort of economic downturn on the horizon.
Let’s dive into how the company has performed and what investors should make of this stock right now.
Cheap valuation, but is it too cheap?
Air Canada remains the largest Canadian airline by a long shot and is the way most Canadian investors play the airline sector. During previous bull market runs, including the rally leading up to the pandemic, Air Canada stock was a darling. However, after peaking at more than $50 per share, Air Canada stock sank below $10 per share at its pandemic low.
Thus, the company’s current stock price of around $17 per share suggests some modest recovery from these levels. But considering Air Canada’s financial situation has improved more slowly than many expected (a $2.2 billion in earnings relative to its massive pandemic-linked losses isn’t bad, but doesn’t come close to the company’s previous losses), there’s certainly much more work to do.
The question is how long Air Canada’s earnings tap can stay open. At more than $6 per share in earnings, this is a stock trading at a dirt-cheap valuation of just three times earnings. That doesn’t make sense, unless investors expect some hiccups down the road.
Declining fuel prices a positive
Restriction on air travel during the pandemic was one of the major causes of the poor performance of Air Canada’s business and stocks. However, as air travel resumed, a hike in fuel prices resulted in an increase in the operation cost of this airline. The second problem was a high amount of accumulated debt.
However, there was a substantial decline in fuel prices during the previous quarter of 2023. This opened up an opportunity for this company to lower its burden and focus on business growth. With a probability of positive business growth in the future, experts suggest now is the right time for investors to purchase AC stock.
Macro uncertainties remain
Despite the generally bullish catalysts mentioned above, I think investors looking at Air Canada stock will need to contend with a very uncertain macro environment. Thus, even though the stock is cheap and the company has some potential margin drivers, it’s one that is ultimately beholden to the willingness and ability of travellers to travel.
If we do end up in a recessionary environment next year (as many experts are predicting), that’s obviously not going to bode well for Air Canada’s financials. The airline is making progress toward improving its balance sheet, given strong current demand. However, any sort of downturn (which the market seems to be pricing in) could be seriously negative for the stock.
So, what to do from here?
Ultimately, Air Canada stock is one of the cheapest in the market right now. One could make the argument that owning a stock at less than three times earnings is essentially an incredible steal, given the company’s recent results and its potential trajectory.
The issue is that Air Canada’s forward-looking prospects are far from certain. With a weakening Canadian consumer, it’s unclear whether the airline’s bottom line metrics can be sustained. Thus, I’m of the view that despite Air Canada’s cheap valuation, this is a stock that could sit on the runway for some time. While I’d consider this a long-term buy at current levels, it’s also clearly a stock that could see some near- to medium-term weakness moving forward.
