Exactly a year ago, the stock markets started feeling the heat of the dreadful spread of the coronavirus. It was still a few weeks to go when the World Health Organization declared it a pandemic on March 11. More vulnerable sectors like hospitality and travel showed immense weakness than broader markets. Canada’s biggest passenger airline Air Canada (TSX:AC) stock fell more than 75% in March last year and hit a multi-year low of $9.3.
Air Canada stock and its recovery
Fast forward to today, Air Canada is currently trading beyond $25, indicating a remarkable recovery of 170%. It’s not easy to time to the market and to enter at exact record lows. But even if you managed to purchase Air Canada stock around those levels in mid-March, you would have more than doubled your money.
So, have you missed the bus? Is it too late to bet on AC now?
Air Canada stock is still trading 50% lower than its record highs last year. It could be an opportunity for long-term investors. But it depends on your risk-taking abilities and how long you can stay invested in the flag carrier.
Air Canada’s last few quarterly earnings indicate some optimism ahead. However, continuing restrictions and mutating viruses jeopardize its recovery. The faster it gets to normal operations, the faster its top-line growth will be. That ultimately depends on vaccinations followed by ease of restrictions.
AC stock: Should you buy Air Canada stock?
On the financials front, Air Canada reported a 70% year-over-year decline in revenues last year. That resulted in a $4.6 billion loss against a profit of $1.5 billion in 2019. Notably, what could concern investors more is the status quo in Q1 2021. Despite the vaccine launch, air travel restrictions have tightened in some parts of the world.
Air Canada cut more routes and lowered its operating capacity in 2021. That implies another quarter of a steep revenue cut and a loss. Rapidly increasing crude oil prices will increase airlines’ operating costs, which will likely delay the road to profitability. How AC stock trades ahead amid its potential weaker numbers will be interesting to see.
Importantly, it is not all gloom and doom for Air Canada. It stands tall on the balance sheet front. While bankruptcy fears might haunt smaller airlines, Air Canada’s strong liquidity position suggests a strong comeback. A potential government aid makes it stronger amid the crisis.
Another positive is its lower cash burn. Airline companies have to spend large cash on maintenance and operating expenses, even if the fleet is grounded. Air Canada has been very tightfisted throughout the crisis when it came to spending cash. Its cash burn rate is notably lower than global airline peers.
Notably, AC stock looks overvalued at the moment. It might continue to oscillate between $20 and $25 levels in the short term. The long-looming federal aid and the pandemic’s end, probably in the second half of 2021, could drive the stock higher.
Air Canada is expected to take years to reach its 2019 profitability. But the stock might recover earlier on the hopes of normalcy and the potential top-line growth.
Before you consider Air Canada, you may want to hear this.
Motley Fool Canadian Chief Investment Advisor, Iain Butler, and his Stock Advisor Canada team just revealed what they believe are the 10 best stocks for investors to buy right now... and Air Canada wasn't one of them.
The online investing service they've run since 2013, Motley Fool Stock Advisor Canada, has beaten the stock market by over 3X. And right now, they think there are 10 stocks that are better buys.
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.