Air Canada (TSX:AC) Stock Soared 40% This Week: Time to Buy?

Air Canada (TSX:AC)(TSX:AC.B) stock surged 40% this week. However, this should not be thought of as a road to recovery just yet.

| More on:
Plane on runway, aircraft

Image source: Getty Images.

There was some respite for Air Canada (TSX:AC)(TSX:AC.B) investors this week after the stock showed a sharp recovery. The stock has soared approximately 40% so far this week after falling below $10 — almost its five-year-low levels.

The surge was in line with the TSX Composite after the Canadian Government announced the stimulus package to combat COVID-19. However, questions remain: Will this recovery last? And what should Air Canada investors do now?

Air Canada and the virus outbreak

Air Canada stock has tumbled more than 75% since mid-February till early this week. It will likely continue to be volatile in short to medium term. Interestingly, when the COVID-19 pandemic starts to wane, it will likely bounce back even faster.

Some were afraid Canada’s flag carrier would go bankrupt, and some thought the stock will fall to $0. However, Air Canada will likely emerge stronger from these challenging times. It has a healthy balance sheet and a strong cash position that will help it traverse through these tough times.

It had $6 billion in cash and short-term investments at the end of Q4 2019. This will likely be enough to fund its short-term liabilities when it is not generating any significant cash from operations. The company has already been working on retaining cash and trimming costs through temporary lay-offs.


Let’s take a look at the valuation of Air Canada stock. In 2019, the airline company reported earnings of $3.37 per share. Last month, the management estimated a marginal increase in its earnings for 2020, which is now unworkable because of the epidemic.

Thus, let’s assume its earnings will take a hit by around 50% and Air Canada still earns close to $1.70 per share. Based on these estimates, Air Canada stock is currently trading at a forward price-to-earnings multiple of 10.5.

This seems reasonable and even indicates room for further growth. However, these earnings estimates could get revised downwards if the virus impact gets extended in the second half of 2020.

The recent surge in Air Canada stock should not be perceived as a signal to a long-term recovery just yet. Short-term gyrations will occur as we continue to deal with uncertainties.

Foolish takeaway

The picture will get a lot clearer when the airline releases its Q1 earnings in early May. We will then get to know how deep the wound is and how long will it take to recover. Till then, Air Canada stock could remain weak, as the pandemic dominates and flights remain grounded.

Importantly, weak performance in one or two quarters should not bother long-term investors. Investors should note that lower oil prices will lower jet fuel prices as well, which forms a large part of airlines’ expenses. Thus, if oil prices remain lower longer than the virus outbreak, it will be favourable for Air Canada.

Air Canada remains a solid play. It’s delivered a 4,000% return in the last decade. It holds more than 50% of share in Canada’s airline market. At the moment, Canadian heavyweight Air Canada, with such an attractive valuation, is indeed a solid investment proposition, even after its recent surge.

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 Vineet Kulkarni has no position in any of the stocks mentioned.

More on Top TSX Stocks

Dividend Stocks

Is BCE Stock Still a Top Telecom Investment in Canada?

Canada’s telecoms can provide growth and income in a defensive shell. Let’s see if BCE is still a top telecom…

Read more »

analyze data
Dividend Stocks

How to Build a Diversified Portfolio With These Top TSX Stocks

Looking to diversify your portfolio? The market is full of stellar options to consider, including these top TSX stocks to…

Read more »

butterfly emerges from chrysalis
Top TSX Stocks

Just Released: The 5 Top Stocks to Buy in May 2023 [PREMIUM PICKS]

Our favourite ideas this month, including the single best way to invest in bank stocks.

Read more »

Dividend Stocks

Get More Out of Your TFSA: Invest in These Popular Canadian Companies

High-yield stocks like Enbridge and high-growth potential stocks like Blackberry are ideal candidates for your TFSA.

Read more »

man touches brain to show a good idea
Top TSX Stocks

New: The 5 Best Stocks to Buy in April 2023 [PREMIUM PICKS]

Inventory management is still dogging some companies -- and investors could profit as everything sorts out.

Read more »

Big Bitcoin logo.
Metals and Mining Stocks

2 Canadian Stocks I’ll Be Buying Hand Over Fist in April

Buying in the early days of recovery may help you ride the bulk of positive momentum and accumulate decent returns.

Read more »

Two hands holding champagne glasses toasting each other with Paris in the background
Dividend Stocks

2 Top TSX Stocks Under $15 Per Share

Two outperforming TSX stocks trading for less than a cheap bottle of wine are excellent buying opportunities right now.

Read more »

dividends grow over time
Top TSX Stocks

Just Released: The 5 Best Stocks to Buy in March 2023 [PREMIUM PICKS]

When we look back five years from now, our bet is that this current $4 annual dividend payout will be…

Read more »