Investing in top-quality stocks that trade at prices which are below their intrinsic values in any market can produce outsized returns. And while I’ve been skeptical of Air Canada (TSX:AC) in the past due to the company’s flagging fundamentals, there’s certainly a case to be made that this is now one beaten-down value stock long-term investors may want to take a look at, given its current multiple of just 3.5 times earnings.
As Canada’s largest airline service provider, Air Canada is the leading TSX-traded airline stock to consider. Let’s dive into whether this valuation multiple makes sense, or if the company could have further downside from here.
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The financial outlook for Air Canada
In the first quarter of 2024, Air Canada reported $4.9 billion in operating revenue, $90 million higher than the same quarter in the year prior. Correspondingly, the airline’s total revenue came in at $5.5 billion, with operating expenses around $5 billion. That leaves some rather considerable operating margin, and some impressive earnings per share of $1.14, particularly given the doldrums the company saw following the pandemic.
Now, some investors may want to see the airline produce better results, given the surge in travel demand we’ve seen following the pandemic, as well as Air Canada’s massive debt load. However, positive earnings is a good thing, and so long as the company can improve its balance sheet, it’s clear investors are working with a company that is producing strong free cash flow (more than $2.3 billion this past quarter).
In other words, at a market capitalization of around $5.5 billion at the time of writing, Air Canada stock is trading with a free cash flow yield of around 50%. That’s certainly hard to find in this market.
What makes this beaten-down stock worth considering?
Air Canada was recognized in the top 20 largest airlines list globally in 2019, and it remains a key player in the Canadian airline market. With a dominant market share position in both international and domestic passenger traffic, this airline has certainly benefited from tailwinds this past quarter (pun intended).
Now, the question will be whether this momentum can be sustained. After all, the Canadian consumer is among the most strapped in the developed world. And with recession flags bright red right now, it’s clear many investors don’t want to be in this stock, if we do get that hard landing some pundits have been talking about for some time.
The thing is, Air Canada’s current multiple seems to more than priced into a very bearish outlook for the next five years. If things turn out better than expected, Air Canada stock could be a real winner. For those looking for deep value right now, this is a top stock to consider, in my books.
