Why Air Canada (TSX:AC) Stock Will Bounce Back

Air Canada (TSX:AC) stock has floundered along with other airliners due to the COVID-19 pandemic, but investors should not lose faith in 2020.

| More on:
A person suffering

Image source: Getty Images

This time last year, Air Canada (TSX:AC) was one of the most promising growth stocks on the TSX. The company had stormed all the way back from a valuation of $1 early in the 2010s to an all-time high of $52.71. However, Air Canada and the rest of the airline industry has been hit with a crisis it could have never adequately prepared for.

Warren Buffett jumped in early on airliners when this crisis began. At the time, I’d suggested that investors should consider emulating his strategy. Buffett has since sold a portion of this stake.

Air Canada: How long will its slump last?

Shares of Air Canada have dropped 63% over the past three months as of close on April 21. Earlier this month, I’d suggested that investors should jump on the stock after it slipped below the $15 mark. The stock has spiked 43% over the past month. However, investors should not expect this bout of turbulence to end anytime soon.

Unfortunately, it is nearly impossible to predict when this dark reality will subside. Some European countries like Germany, Austria, and Denmark have started to re-open in response to positive case numbers.

Canadian politicians, on the other hand, are committed to pursuing extreme caution. Experts and officials have also warned of a potential second wave of COVID-19 infections in the fall and winter months of this year and next.

On April 21, Air Canada announced the suspension of all United States-bound flights. The two governments recently extended their non-essential border closure for another 30 days. Air Canada admitted that it had reduced its schedule by “more than 90%” since the middle of March, which will have a devastating impact on its earnings in 2020.

The losses to Air Canada and other airliners are incalculable right now. Airliners faced a years-long pullback after the September 11, 2001 attacks. Travel volumes took roughly half a decade to normalize by the latter half of the 2000s. The immediate impacts of the COVID-19 pandemic will be more severe, and there is no timeline on normalization.

Two reasons to have faith in airliners

The situation looks grim for Air Canada and the rest of the airline industry, but there is reason for some optimism going forward. In the years following September 11, 2001, travellers were fearful even with new security measures in place. Experts estimate that a COVID-19 vaccine will emerge in the next 12-18 months.

This means that there will eventually be a concrete resolution to this crisis. It also means that a path to normalization for the airline industry may be quicker compared to the 2000s.

A price war between oil producing countries and cratering demand due to the COVID-19 pandemic has pulverized the oil and gas industry. The price of West Texas Intermediate crude fell into negative territory to start this week. Jet fuel prices have predictably taken a huge hit as well.

This will provide some measure of relief for Air Canada and other airliners. However, manufacturers like Boeing and Airbus may see orders decline for newer fuel-efficient models.

Should you buy Air Canada stock today?

Air Canada stock last had a favourable price-to-earnings ratio of 3.2 and a low price-to-book value of 1.0. Investors can expect to see its first quarter results on May 4. A slew of rough earnings will be released in the weeks ahead for Canada’s top companies.

Air Canada has an improved balance sheet from when it was facing crisis in the early 2010s. Value investors should consider jumping on its dips going forward.

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 Ambrose O'Callaghan has no position in any of the stocks mentioned.

More on Investing

money cash dividends
Dividend Stocks

TFSA: 3 of the Best Canadian Dividend Stocks to Buy This Year

Are you looking for some of the best Canadian Dividend stocks to buy this year? Here are three great options…

Read more »

Golden crown on a red velvet background
Energy Stocks

3 Canadian Dividend Aristocrats to Buy and Hold for Passive Income

Are you seeking safer options amid elevated market volatility? Consider these three Canadian dividend aristocrats to receive uninterrupted passive income…

Read more »

A colourful firework display
Tech Stocks

3 Venture Capital Stocks That Started 2023 With a Bang

Even if a company starts a year strong, it may not hold that momentum throughout the year. Still, these VC…

Read more »

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

Suncor Energy Stock: Has it Bottomed Out?

Suncor Energy Inc (TSX:SU) stock has been falling lately. Has it bottomed out yet?

Read more »

data analytics, chart and graph icons with female hands typing on laptop in background
Stocks for Beginners

2 Top Stocks to Buy in February 2023

Here are two of the best Canadian stocks you can buy in February 2023.

Read more »

Aircraft wing plane
Investing

Bombardier Stock: Should You Invest in the Current Bullish Trend?

Capturing a bullish trend from beginning to end is an exception, not the rule. In most cases, you will only…

Read more »

A worker uses a double monitor computer screen in an office.
Investing

1 Top TSX Stock to Buy as Tech Makes a Rebound

Shopify (TSX:SHOP) stock is a great e-commerce gem to buy and hold for the long run, as shares look to…

Read more »

A worker wears a hard hat outside a mining operation.
Metals and Mining Stocks

Cameco Stock Is Approaching its 52-Week High: Time to Invest?

Cameco (TSX:CCO) stock is nearing 52-week highs once more after falling from September last year, but should you wait for…

Read more »