AC:CC - Why I'm Changing My Mind About Air Canada Stock
2024-03-12 21:30:00 ET
Air Canada ( TSX:AC ) stock has been on many investors’ radars since the start of the pandemic. The Canadian airliner, which traded above $50 prior to the pandemic, was one of the biggest losers as a result of all the shutdowns and closure of borders for non-essential travel.
In early January 2020, Air Canada stock hit a high of more than $52. Just two months later, in March 2020, the stock had fallen by more than 75%, creating a lot of interest for investors.
Yet despite all the interest in the stock and the fact it offered an unbelievable discount, it was clear early on that Air Canada was in for a multi-year struggle.
Not only did the effects of the pandemic last longer than many initially expected, but Air Canada’s operations were impacted significantly, with revenue in the first year of the pandemic falling by nearly 90%.
This made the situation dire for Air Canada stock, and in just two years, it took on more than double the debt that it had going into the pandemic. It was this debt and a slower recovery than many initially expected that made me believe Air Canada wouldn’t see a recovery for years, and I recommended investors avoid the stock.
Now, over four years after the pandemic first hit, the stock is still unbelievably cheap. In those last four years, the highest it has traded is just $31, still roughly 40% off its pre-pandemic high. And in the last 52 weeks, its high has only been $26.04. Not to mention, today, it trades just off its 52-week low of $16.04 at a current price of roughly $17.75.
So, with Air Canada stock still trading unbelievably cheap, here’s why I’ve changed my mind about it and think it’s one of the best stocks to buy now.
The Canadian airliner’s operations are recovering rapidly
One of the most significant reasons I recommended investors avoid Air Canada stock in the first few years after the pandemic hit was that its debt became extremely elevated, which pushed its enterprise value to insane levels.
Heading into 2020, Air Canada stock had just $5.2 billion of long-term debt on its balance sheet . By the end of 2021, that debt had ballooned to more than $12.8 billion.
Therefore, even if Air Canada stock had been able to see a quicker recovery in its sales, its heavy debt load would have likely still weighed on its share price performance.
Today, however, the stock is in a much different place. Not only did it generate record revenue in 2023, passing its 2019 sales for the first time, but it was also profitable in 2023 for the first time since the pandemic.
This is crucial because it not only shows the industry is recovering and gives investors confidence in Air Canada stock going forward, but those earnings and excess cash flow it generated now allow it to start significantly paying down all that debt it took on. In fact, as of the end of 2023, Air Canada’s long-term debt had declined to less than $11 billion.
When can Air Canada stock recover?
Predicting exactly when Air Canada will recover is tricky, especially in this market environment with so much uncertainty. What we do know is that it’s trading unbelievably cheap and won’t stay this low forever.
Furthermore, with its operations now essentially fully recovered and with the stock now focused on strengthening its balance sheet and paying down its debt, many of the headwinds preventing it from seeing a recovery rally have now dissipated.
Plus, looking forward, in 2024, analysts expect its revenue will rise another 5%. And while higher cost pressures have been hurting margins as a result of inflation, Air Canada stock is still expected to generate normalized earnings per share of $3.74.
Therefore, with Air Canada stock trading at a forward price-to-earnings (P/E) ratio of just 4.7 times, there’s no question that it’s unbelievably cheap. For comparison, in the three years leading up to the pandemic, Air Canada’s average forward P/E ratio was roughly 7.7 times.
So, if you’re looking for an ultra-cheap and high-potential stock to buy now, Air Canada stock is undoubtedly one of the best options.
The post Why I’m Changing My Mind About Air Canada Stock appeared first on The Motley Fool Canada .
Fool contributor Daniel Da Costa has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .
2024