Air Canada (TSX:AC) is perhaps one of the most well-known companies and brands in Canada. As Canada’s top airline, this company has been on a wild ride in recent years. Heading into the pandemic, shares of AC stock soared to more than $50 per share. However, the company’s stock price plummeted, and despite making some ground recently, continues to hover under $20 per share.
With a resurgence of consumer spending on travel in this post-pandemic world, many investors may have expected Air Canada to outperform relative to the overall market. However, the company’s fundamentals took a hit, when it was forced to take on significant debt to fund operations in 2020 and 2021.
With that said, let’s dive into whether Air Canada is worth buying right now, or if investors may benefit from a wait-and-see approach with this stock.
Air Canada’s valuation is incredibly low
One of the key drivers of investor interest around Air Canada stock has to be its extremely low valuation multiple. Now trading at around 3 times trailing earnings, one has to wonder how and why this stock is so cheap.
As mentioned, Air Canada’s balance sheet has deteriorated significantly following the pandemic. Additionally, the economic outlook for Canada and the global economy as a whole remains uncertain. With so much debt floating around in the economy, it’s unclear whether the travel industry can maintain this torrid pace of growth we’ve seen over the past two years.
Air Canada’s core business, and in particular its international long-haul flights, have performed much better than expected in recent quarters. This may lead to a near-term bump in the company’s stock price and is something to watch closely.
Labour and fuel costs matter a great deal
For Air Canada, two key variables really drive the unit economics for its business. Those are mainly variable costs (capital expenditures are generally fixed and spread out over decades). Labour and fuel costs matter a great deal to Air Canada’s bottom line, and while labour contracts are pretty sticky, lower jet fuel prices in recent months is a nice tailwind for investors.
Now, I expect continued turbulence with the price of oil, and therefore jet fuel, in the coming quarters. The market appears to be pricing in much higher supply than previously thought, in line with weaker demand. If this doesn’t materialize as expected, this tailwind could turn into a headwind just as quick.
Bottom line
Overall, Air Canada is a tricky company to assess right now. On the one hand, it’s clearly dirt-cheap, trading at just three year’s worth of trailing profits. On the other hand, the market appears to be pricing in a slowdown, and there really isn’t a more economically sensitive sector out there than airlines.
Thus, I’m remaining cautious on Air Canada stock for the time being. Value investors may consider nibbling here, but I’m not so sure the growth picture will be rosy moving forward for this stock.
