Air Canada (TSX:AC) stock has taken investors on a roller-coaster ride in the last decade. Shares of the leading Canadian airline rose from $1.5 in January 2010 to an all-time high of $52 in January 2020. The COVID-19 pandemic decimated airline stocks, including Air Canada, as borders were shut and travel came to a standstill.
Air Canada and its peers were forced to increase balance sheet debt amid plunging sales and negative profit margins to remain operational. While global travel demand has rebounded, the airline sector continues to face headwinds such as inflation, higher interest rates, and elevated fuel prices.
Down 64% from all-time highs, Air Canada might be attractive to value investors. Let’s see why.
How did Air Canada stock perform in Q1 of 2024?
Air Canada reported operating revenues of $5.2 billion in the first quarter (Q1) of 2024, up $339 million year over year. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) stood at $453 million, up $42 million from the year-ago period. It generated a free cash flow of $1 billion in Q1 and ended the quarter with a net-debt-to-adjusted EBITDA ratio of 0.9 times. Its cash flow was used to deleverage the balance sheet by reducing gross debt, resulting in a rating upgrade from S&P Global Rating, a reputed credit agency.
A key ratio for airline stocks is the cost per available seat mile (CASM), which determines a company’s operational efficiency. The CASM ratio measures the operating cost of each seat mile flown and is calculated by dividing operating costs by available seat miles.
Due to higher labour, maintenance, and technology expenses, Air Canada’s adjusted CASM rose 1.6% to 14.76 cents in Q1 of 2023.
What’s next for Air Canada stock?
Air Canada expects to increase capacity between 6% and 8% year over year in 2024. It is also forecast to end the year with EBITDA between $3.7 billion and $4.2 billion. The company ended 2023 with a net debt of $3.78 billion, which might seem significant. However, its net debt has reduced by roughly $3.8 billion in the last four quarters.
With $10 billion in total liquidity, Air Canada has enough flexibility to navigate an uncertain macro environment and reinvest in growth projects. The airline giant is forecast to spend $2.1 billion in capital expenditures this year and has allocated $12.8 billion towards capital projects between 2025 and 2028.
Air Canada plans to purchase around 80 aircraft in the next five years to modernize its fleet, which should also boost future cash flows.
Analysts tracking Air Canada stock expect its earnings per share to decline from $4.56 in 2023 to $3.55 in 2024. So, priced at 5.3 times forward earnings, Air Canada stock is quite cheap and should expand its earnings once interest rates move lower and inflation is brought under control.
Bay Street remains 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 Air Canada stock is $27.56, suggesting an upside potential of over 50% from current levels.
