One of the most important traits that a business can have, especially in troubled times like the ones we are going through right now, is resilience. A resilient company would fight with everything it has just to stand its ground, no matter how bad the odds are. This is one trait that Air Canada (TSX:AC) undoubtedly possesses. But there is a catch.
As a resilient company, Air Canada is surviving through one of the worst times the airline business has ever seen. It’s surviving despite almost non-existent revenue generation, burning through its cash pile at the rate of millions per day. Still, the worst part is that the situation isn’t getting any better. Still, Air Canada is far from a losing bet. If fact, it might pay off great.
100% gains by 2021
It’s definitely possible that Air Canada might see 100% gains by 2021, especially if you consider the $16 share price it has been hovering around for a while now. One thing that can increase the probability of Air Canada recovering enough to get you 100% gains or more (if you buy now) is a vaccine. Even if it isn’t available very readily, it can sway investor confidence in Air Canada’s direction.
One reason why investors are reasonably sure that Air Canada won’t declare bankruptcy is its dominance in the sector. And the company is solidifying it even further by purchasing Air Transat, at about one-fourth of the price. From buying the company at $18 per share, Air Canada is proposing to move with the acquisition at $5 per share. And considering the shape the industry is in, chances are that the deal will go through, even at this price.
So, recovery isn’t an issue with Air Canada. The company, most likely, will recover. The problem is with the timeline.
100% gains by 202X
What if no vaccine comes to save the day? What if we are subjected to partial lockdowns and learn to live with COVID-19, as wave after wave of the deadly virus plague the country? The economy will keep on limping, and many businesses will regain some resemblance of pre-pandemic normalcy, but the same can’t be said about Air Canada.
Fear of the virus, combined with the job and income losses the virus will bring, if it stays with us for a while, will keep leisure travel at a minimum, and even business travel will be severely limited. Air Canada’s cash pile is extensive, but it has limited avenues to raise liquidity at this point. A government intervention (if it comes) might not be great for the company’s stock.
That will push the 100% gains and rapid recovery way into the future.
Air Canada can be an excellent recovery investment. But it can also be deadweight in your portfolio that you may have to keep for years before it offers you 100% gains. If you consider adding Air Canada to your portfolio, you should consider the risks associated with a very drawn-out recovery. But if you are reasonably sure that the company will regain some of its former glory by 2021, go for it.
Speaking of Air Canada...
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Fool contributor Adam Othman has no position in any of the stocks mentioned.