In the decade prior to COVID-19, Air Canada (TSX:AC) delivered returns of more than 3,000% to shareholders, making it one of the top-performing TSX stocks in that period. Today, valued at a market cap of $6 billion, Air Canada stock trades 58% below all-time highs, allowing you to buy the dip and benefit from outsized gains when market sentiment improves.
The COVID-19 pandemic resulted in global lockdowns, completely decimating the airline sector. Moreover, the capital-intensive nature of the airline industry increased the interest costs significantly in the last two years, narrowing profit margins in the process. Additionally, a sluggish macro environment, inflation, and slower consumer spending have acted as headwinds for Air Canada and its peers, partially offsetting robust travel demand in a post-pandemic world.
Let’s see if it makes sense to own Air Canada stock right now.
How did Air Canada perform in Q1 of 2024?
In the first quarter (Q1) of 2024, Air Canada reported operating revenue of $5.2 billion, up $339 million from last year. Its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) grew by $42 million to $453 million, indicating a margin of 8.7%.
Air Canada reported passenger revenues of $4.44 billion in Q1, up 9% year over year due to higher capacity and traffic. It emphasized that stable air travel demand drove top-line growth in Q1. Further, percentage growth in sales from higher-margin premium cabins accounted for 30% of total passenger revenue growth in Q1 of 2024.
In the March quarter, Air Canada generated more than $1 billion of free cash flow allowing it to reduce balance sheet debt and strengthen its balance sheet. Its net debt-to-adjusted EBITDA fell to 0.9 at the end of Q1. The company’s improving financials also led to an improvement in credit rating from “BB-” in April to “BB” in May. Air Canada expects to generate significant free cash flow in 2024, providing it with the flexibility to reinvest in organic growth and repay its debt, both of which should drive future cash flows higher.
Is Air Canada stock undervalued?
Air Canada ended Q1 of 2024 with $10 billion in balance sheet cash, which includes $8.68 billion in liquid investments and $1.32 billion in undrawn credit facilities. In the next 12 months, Air Canada expects to meet its liquidity requirements from operating cash flow and investments.
In the last three months, Air Canada has reduced its long-term debt from $13 billion to $11.28 billion. Its net debt has also fallen from $4.56 billion to $3.78 billion. In the last 12 months, Air Canada stock has reported a free cash flow of $2.82 billion. So, priced at 2.1 times trailing free cash flow, Air Canada stock is really cheap and is positioned to deliver steady gains going forward.
Analysts tracking Air Canada stock expect its earnings to improve to $4.08 per share in 2025, up from $3.53 per share in 2024. So, priced at four times forward earnings, Air Canada stock trades at a 60% discount to consensus price target estimates in June 2024.
