It’s not uncommon to hear Air Canada (TSX:AC) referred to as a cheap stock. It’s certainly cheaper in cost-per-share than it was when COVID-19 first came on the scene. It’s also cheaper relative to sales now, compared to then. However, the valuation picture for Air Canada isn’t entirely clear. The company has some multiples that are fairly high, and it’s not clear when the company will return to profitability. In this article I will make the case that Air Canada isn’t really a “cheap stock” today, though it may become one if earnings turn around.
Multiples give mixed signals
The big thing to keep in mind with Air Canada’s valuation metrics is that they give very mixed signals. On the one hand, AC trades at a rock-bottom 1.63 price-to-sales ratio. On the other hand, the price-to-book ratio is extremely high at 55. Air Canada had to take on a lot of debt in order to make it through the COVID-19 pandemic. As a result, it has very little book value. Its equity is positive but small compared to its market cap.
Also, when we look at Air Canada’s earnings and operating cash flow, we see that they are negative. So no earnings or cash flow multiples can be computed. This means that the valuation picture is very mixed. The extremely low sales multiple suggests that the company could become cheap if it becomes profitable and has high margins. But it isn’t profitable, and we don’t know when it will be.
Recovery uncertain
Speaking of Air Canada’s profitability:
It remains an open question.
The company has lost money in every single quarter since COVID-19 hit North America in 2020. As an airline, it has high fixed costs. When people aren’t traveling enough, AC doesn’t make enough money to turn a profit. As long as COVID-19 lockdowns and self-isolation orders are widespread, AC will not be able to generate positive earnings. Its interest expenses alone exceed more than $100 million per quarter, and it has a lot more fixed costs on top of that. So, as long as Canadians are reticent to travel, Air Canada won’t have positive earnings, and its valuation will be inherently cloudy.
When will this situation change?
Well, Air Canada itself forecast that it would take three years to get back to 2019 revenue levels. That was in the second quarter of 2020. On AC’s own schedule, we should see about $4.7 billion in revenue and positive earnings in the second quarter of 2023. That’s still a long ways off, so I wouldn’t hold my breath.
Foolish takeaway
It’s been a rough few years for Air Canada. Ever since the second quarter of 2020, the company has been consistently losing money, with no end in sight. The company’s most recent quarter saw the rise of the Omicron variant, which led to more travel bans and self isolation orders for Canadian airlines. AC’s next quarterly earnings release probably won’t be very good. So we’re not out of the woods yet. The company needs positive earnings before we can really do a complete valuation analysis of it.
