Is Air Canada About to Nosedive?

Air Canada (TSX:AC)(TSX:AC.B) looks like it’s going to plunge into the dirt, but should investors really be concerned? Or is this dip a buying opportunity?

| More on:
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

After an incredible upward run in 2017, Air Canada (TSX:AC)(TSX:AC.B) shares have taken a step back, but I believe this pullback is a major buying opportunity for investors looking to capitalize on the next leg up. I find it hard to believe that Air Canada has reached terminal velocity and is coming back down for a landing. There’s still plenty of upside that remains, and this recent dip is simply a bit of turbulence, which should not be cause for concern for investors who’ve been enjoying the ride up over the last two years.

Air Canada is down ~16% from 52-week highs and ~10% for the few weeks in 2018. Given that the airlines are incredibly cyclical, such a sudden decline may have investors reaching for barf bags, but before you make any impulse decisions, like shorting Air Canada, let’s look at some of the reasons why Air Canada has been flying lower over the past month and what to expect this year.

Unfortunately, Air Canada is slated to have higher expenses in 2018 thanks in part to investments to its insourced loyalty program (slated for a 2020 launch) and enhancements to the overall customer experience. With a 1.81 debt-to-equity ratio, Air Canada’s debt is starting to become worrisome to some, and recent expenses may be alarming; however, these initiatives will result in an ample amount of cost savings down the road. It’s short-term pain for long-term gain, right?

Also, there are no signs of a drastically slowing economy, so all signs point to continued growth in 2018 and beyond, which remains promising news for the airlines. Despite upped expenses for the betterment of the company’s future cost savings and hefty debt load, Air Canada is likely to experience another solid year of market-beating gains, as its cash flows go towards paying back the debt that may be ringing alarm bells in the ears of prospective investors.

Bottom line

Air Canada’s still a cheap stock at 3.48 times trailing earnings. The company is spending to improve its long-term cost structure, which will allow it to better withstand the next recession.

Although still dangerously cyclical, Air Canada is still a great bet for medium-term investors who want to enjoy the ride from a continued cyclical upswing, which I believe is far from over. Don’t expect another year of +80% returns though, since the rise of ultra-low-cost carriers could cause a dent in Air Canada’s top-line numbers.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

More on Investing

Profit dial turned up to maximum
Tech Stocks

$1,000 Invested in Constellation Software Stock Would Be Worth This Much Today

Constellation Software (TSX:CSU) is trading above $2,000 today. Why this stock is so expensive, and is it worth buying?

Read more »

Dividend Stocks

Passive Income: 3 Top Canadian Stocks to Buy for Monthly Dividends

Companies such as Pembina Pipeline and Killam Apartment REIT pay investors monthly dividends, making them top bets for income-seeking investors.

Read more »

Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks
Stocks for Beginners

TFSA Investors: Top TSX Stocks to Buy With $6,000

Here are two safe, dividend-paying TSX stocks for your long-term portfolio.

Read more »

Gold medal

3 Growth Stocks That Could Be Huge Winners in the Next Decade and Beyond

Are you looking for growth stocks that could be huge winners in the next decade? Here are three top picks!

Read more »

Retirees sip their morning coffee outside.

Retirees: How to Make Over $95/Week in Passive Income TAX FREE!

Canadian retirees who are hungry for passive income should look to snag stocks like Sienna Senior Living Inc. (TSX:SIA) in…

Read more »

Man holding magnifying glass over a document

Where to Invest $500 in the TSX Right Now

Given the massive correction, long-term investors can start buying stocks like Shopify and goeasy to outpace the broader markets by…

Read more »

Aircraft wing plane

Air Canada Stock Is a Fantastic Deal Right Now

Air Canada (TSX:AC) is a great stock to own, as market fear turns into hope amid falling recession fears.

Read more »

Pixelated acronym REIT made from cubes, mosaic pattern

Beginner Investors: Get Passive Income by Investing in REITs!

You can get passive income by investing in REITs like Northwest Healthcare Properties REIT (TSX:NWH.UN).

Read more »