Air Canada (TSX:AC)(TSX:AC.B) and Enbridge (TSX:ENB)(NYSE:ENB) shares have been beaten down significantly in the ongoing market crash. AC has taken a beating from COVID-19 travel restrictions, while ENB has been hit hard by the global collapse in oil prices.
The two developments are related. The decline in air travel has reduced the demand for oil, while supply has soared thanks to Russia and Saudi Arabia increasing output. So, the fates of Air Canada and Enbridge are intertwined.
However, there’s an important distinction: Enbridge unambiguously stands to benefit from increased demand for oil, while Air Canada earns more money with cheaper oil. So, these two beaten-down stocks represent very different bets on a future stock market rebound. The question is, which stock’s ideal scenario is most likely to play out?
Likely COVID-19 impact
As previously mentioned, both Air Canada and Enbridge are being negatively impacted by COVID-19. Unfortunately, the specifics aren’t yet available. Both companies are releasing Q1 earnings in May, so we’ll have to wait a while.
Nevertheless, it seems quite probable that Air Canada will be hit far harder by COVID-19 than Enbridge. As I’ve written in previous articles, a full 90% of AC’s passenger flights have been cancelled. The company is trying to make up the losses with more cargo flights, but that’s unlikely to fully recoup what’s been lost.
Enbridge, however, is currently able to operate normally. The company’s shipments are likely down due to lower demand for oil in the U.S., but there’s no evidence that its business has collapsed outright like Air Canada’s has. If the crisis goes on long enough, and several tar sands producers go bankrupt, that could cause some serious problems for ENB. However, it’s currently not being hit as hard as AC is. The markets seem to agree, as ENB hasn’t fallen as much as AC has.
According their most recent earnings releases, both Air Canada and Enbridge did exceptionally well for the 2019 fiscal year. AC grew its earnings from $37 million to $1.47 billion, while ENB grew its earnings from $2.5 billion to $5.3 billion. These are both incredible numbers. However, Air Canada takes the win on this front with utterly explosive year-over-year earnings growth.
With that said, historical earnings aren’t the best metric to look at for these companies. We’re living through unprecedented events, and future earnings will not resemble past earnings for either company.
The factors influencing the future are fairly obvious, too. If COVID-19 passes, Air Canada can get back to business. If oil recovers, Enbridge can get its business back to past highs. Until one or both of these developments materialize, both ENB and AC will remain way below all-time highs.
Despite the fact that Air Canada had been doing better than Enbridge in the pre-COVID era, the latter looks like a better bet now. The simple reason is that there are more possible scenarios for Enbridge’s business to thrive in. Any increase in demand for crude oil will benefit Enbridge. That could happen for any number of reasons.
Air Canada, however, needs one very specific thing to happen: an easing of travel restrictions. Imagine a scenario where Russia and Saudi Arabia cut output and the U.S. economy re-opened, but Canadian airlines stayed grounded. Enbridge benefits there, but Air Canada doesn’t. But any scenario where Air Canada gets back to business also benefits Enbridge. So, there are simply more possible scenarios where Enbridge can thrive in this environment
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 Andrew Button has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.