Airline stocks such as Air Canada (TSX:AC) are some of the most volatile, yet at times, lucrative stock options on the market. But is Air Canada stock a buy right now?
Let’s try to answer that question.
Air Canada: A quick recap
Air Canada’s stock price is a two-part story. The first part of that is the period, if not the entire decade, before the pandemic. In that period, Air Canada was one of the best-performing stocks on the market.
Specifically, the stock shot up over a whopping 1,300% in the period between December 2010 and December 2019. During that period, Air Canada also posted multiple record-breaking quarters.
But when the pandemic started in 2020 and everything shut down, Air Canada’s operations (and by extension) came to a screeching halt. As a result, the stock price dropped from nearly $50 per share down to the mid-teens.
And apart from a few bumps up into the 20s, the stock has remained at that lower level since then. In fact, as of the time of writing, the stock trades just over $18, which is $2 off from its 52-week low.
For some investors, particularly those long-term investors with an appetite for risk, that may be a reason to consider Air Canada stock now.
But there are a few more factors to consider.
Air Canada: A case to buy
As noted above, when the pandemic hit, nearly all travel ceased. Fast forward to today, and travel demand is finally hitting pre-pandemic levels. That improvement was evident in the most recent quarterly update from the airline.
In that quarter, Air Canada saw operating revenues surge 19% over the same period last year to $6.344 billion. Overall, the airline posted earnings of $1.281 billion for the quarter, representing an improvement of $850 million over the prior period.
With revenue and earnings rising, it’s certainly possible that the stock will begin an upward movement.
A key driver here is traffic. More people are travelling than last year, which is finally boosting the travel sector. More importantly, both international and business travel are beginning to show signs of improvement following the pandemic. These are both key indicators that lag the overall market emerging from the lockdowns we had two years ago.
Air Canada stock: Is there a reason to hold or even sell it?
While there is a significant upside to buying Air Canada stock right now, that upside still comes with considerable risk. In short, no stock is truly without some risk.
In the case of Air Canada, there are other factors that investors are often dismissive of. A great example of this is a long-forgotten famous quote by Warren Buffett: “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines.”
In other words, airlines are big, expensive ventures with tiny margins. There are also factors such as changing labour standards, legislation and even the weather in local and international markets to deal with. Keep in mind that those factors and required crews apply to both departing and arriving ports.
In short, Air Canada stock may trade at a discount, but it’s not without considerable risk. And unless you’re a long-term investor with an appetite for risk or already invested in Air Canada stock, there are other options to consider.
