It’s quite common to see investors missing out on profit opportunities, as they may be worried about a company’s financial statements or even its valuation. While you must analyze the company’s financials, they should be used as a starting point for your research, as a stock’s price is tied to future potential and not historical performance.
So, past financials might be quite misleading, especially if a company is at a turning point with multiple growth drivers.
We’ll take a look at two such airline stocks that are trading at a bargain. The COVID-19 pandemic decimated the core businesses of airline companies last year, which resulted in a massive decline in stock prices of Air Canada (TSX: AC) and American Airlines (NYSE:AAL),
American Airlines has focused on liquidity
In 2020, American Airlines revenue fell by 62.1% year over year. The company reported an operating loss of US$10 billion compared to an income of US$3.07 billion in 2019. However, the faster-than-expected rollout of vaccines south of the border should get the dreaded virus under control.
AC Total Return Level data by YCharts.
In fact, the U.S. government might distribute the vaccine to all adults in the country by the end of July. This suggests travel demand should normalize by the end of 2021 at least in the United States. However, it might take another year (or even more) for global air travel demand to return to normal.
American Airlines is trading at a cheap valuation and is still trading 54% below its record high. With a market cap of US$15.5 billion, the stock has a price-to-forward-sales multiple of 0.6.
It is one of the largest airline companies in the world with an efficient network of routes. American Airlines realized US$1.3 billion in cost savings in the last year and has US$14.3 billion in liquidity to weather the ongoing storm and macro-economic turbulence.
Analysts expect American Airlines sales to rise by 50% to US$26 billion in 2021 and by 42.5% to US$37.05 billion in 2022. Comparatively, its bottom line is forecast to improve from a loss per share of US$19.66 in 2020 to earnings of US$0.26 in 2022.
Air Canada stock is down 49% below record highs
In 2020, Air Canada sales were down an astonishing 70% year over year at $5.83 billion compared to sales of $13.3 billion in 2019. It reported a negative EBITDA of $2 billion last year compared to a positive figure of $3.63 billion in 2019. Its operating loss stood at $3.76 billion compared to a profit of $1.65 billion in 2019.
In order to tackle mounting losses, Air Canada raised $6.78 billion in a series of financing transactions last year and ended 2020 with $8 billion in liquidity. It also completed a company-wide cost-reduction and capital-deferral program totaling $1.7 billion.
While capacity fell by 67% last year, Air Canada’s operating expenses were down 45% or by $7.87 billion compared with 2019, which outlines the significant progress it made on managing variable costs and reducing fixed expenses.
The Foolish takeaway
Air Canada and American Airlines are two quality companies that have lost massive market value in the last year. Both these stocks have improved their liquidity position to make it through these uncertain times.
Investors should expect both the stocks to remain volatile in 2021 and gain momentum towards the end of this year if the pandemic is brought under control. Investors looking for a solid contrarian bet can look to add both these stocks to their portfolio right now.
