Should You Buy Air Canada (TSX:AC) at These Levels?

Given its healthy long-term growth prospects and attractive valuation, I am bullish on Air Canada.

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After showing some recovery in the first quarter, Air Canada (TSX:AC) has been under pressure, losing around 11% of its stock value since then. The resurgence of COVID-19 cases due to the Delta Variant appears to have weighed on the company’s stock price. Last week Prime Minister Justin Trudeau introduced a new policy, which mandates all air travellers and interprovincial train passengers to be fully vaccinated as of October 30. So, given the circumstances, let’s assess whether Air Canada would be an excellent buy right now.

The ongoing challenges

Amid the easing of restrictions and opening of borders, Air Canada’s operating metrics and financials improved in the second quarter. Its available seat miles increased by 78% year over year, while its revenue grew 59%. Its operating loss contracted to $1.13 billion from $1.55 billion. Meanwhile, it burnt $745 million of cash or about $8 million per day, which was better than management’s expectation of $13-$15 million per day.

Further, Air Canada’s management expects its available seat miles to rise 85% in the third quarter. Despite the increase, its available seat miles would still be 65% lower than its 2019 levels. The management also expects to utilize net cash of $280-$460 million during the quarter, representing an average cash burn of $3-$5 million per day. The rise in COVID-19 cases and implementation of the government’s mandatory vaccine policy could slow down its recovery in the near term. Meanwhile, let’s look at its growth prospects.

Growth drivers

At the end of the second quarter, Air Canada had $9.8 billion of liquidity. So, the company is well-equipped to ride out this crisis. Further, with already 72% of the Canadian population already fully vaccinated, I believe the mandatory vaccine policy would not hurt Air Canada much. Rather, the policy could bring back confidence among air travelers.

Meanwhile, Air Canada has resumed its service to various destinations worldwide ahead of the holiday season. It has also strengthened its cargo segment by adding new aircraft and routes. Besides, the company has commenced a $16 million project at its Toronto Pearson International Airport cargo facility, which could enhance its capabilities of handling pharmaceuticals, fresh food, and other perishables. Along with these factors, the introduction of its loyalty program, Aeroplan, and its cost-reduction initiatives could drive Air Canada’s financials in the coming quarters.

Bottom line

Despite the near-term challenges, Air Canada’s long-term growth prospects look healthy. The widespread vaccination, reopening of borders, and improvements in economic activities could increase passenger demand, boosting the company’s financials in the coming years.

Meanwhile, Air Canada is currently trading at over 50% discount from its pre-pandemic levels. Besides, its valuation looks attractive, with its forward price-to-sales multiple standing at 0.7. So, I believe investors with over three years of investment horizon can accumulate the stock to earn superior returns.

Notably, analysts are also bullish on the stock. Of the 18 analysts covering the stock, 11 have issued a “buy” rating, while seven have given a “hold” rating. None of the analysts are in favour of a “sell” rating. Their consensus price target stands at $29.97, representing an upside potential of 23%.

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.

The Motley Fool has no position in any of the stocks mentioned. Fool contributor Rajiv Nanjapla has no position in any of the stocks mentioned.

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