5 Things to Know About Air Canada Stock

Air Canada stock looks like one of the cheapest on the market. But before you buy the airliner, here are five things to consider.

| More on:
An airplane on a runway

Image source: Getty Images.

After taking an enormous blow from the pandemic, Air Canada (TSX:AC) has been one of the most popular Canadian stocks over the last few years. If you’re interested in buying Air Canada stock before its recovery, here are five of the most important things to know about it in October 2022.

Air Canada reports earnings on October 28

Earnings are key to determining how a stock will perform in the short-term, particularly in this environment. This is especially true for Air Canada stock which has been impacted for years. Solid earnings could result in significant upside, while disappointing results could cause the stock to fall in value once again.

But as you’ll see below, even if Air Canada does report strong earnings and demonstrates a continued recovery, there’s still a lot of work to do for the company to recoup all the value that’s been lost in the last two and a half years.

Air Canada stock could feel the effects of the pandemic for years

Throughout the pandemic, as Air Canada’s operations nearly ground to a halt, the stock took on tonnes of debt while diluting shares. So, while the stock offers upside as it recovers, it could be years before it reaches its pre-pandemic price upwards of $50 a share.

At the end of 2019, just before the pandemic, Air Canada stock had a share price of $48.51, a market cap of $12.85 billion, and an enterprise value (EV) of $16.34 billion.

As of Friday’s close, its share price of $16.60 is down roughly 66%. However, its current market cap of $5.96 billion is down just 54%, which is more of an accurate value. The share price has fallen more than the market cap due to dilution.

The best measure of all is EV since it considers debt. And Air Canada raised more cash from debt than it did from diluting shares. Its EV as of Friday is $13.83 billion, down just 15% from where it was before the pandemic at the end of 2019.

Air canada stock
While Air Canada’s share price has remained low, its enterprise value is near pre-pandemic levels.

This means that Air Canada stock is not as cheap as it looks, and it has a significant amount of debt that it will need to pay down for years. This is why it’s crucial for Air Canada stock to recover its operations as soon as possible.

The airliner’s revenue has been rising for five straight quarters

The positive news for Air Canada is that for five consecutive quarters, its revenue has been higher year-over-year. And in the third quarter, which Air Canada reports at the end of this month, analysts expect a 25% increase in revenue and more than 135% in growth year-over-year.

These numbers demonstrate that Air Canada stock is on the right track. Now that its business is recovering, investor interest is shifting toward profitability.

The stock is finally expected to be profitable for the first time since the pandemic

Profitability is crucial for any business, but it’s essential for Air Canada since it has so much debt to pay down. So, with the stock expected to earn positive earnings per share (EPS) this quarter, it couldn’t come at a better time. If Air Canada successfully reports positive EPS, it would end a streak of 10 straight quarters of negative EPS.

Plus, its earnings before interest, taxes, depreciation, and amortization (EBITDA) has been recovering lately and is expected to grow to over $800 million in the quarter. So come October 28, many investors will be watching closely to see how Air Canada stock has performed.

The average analyst target price for Air Canada stock is $25.46

With an average analyst target price of nearly $25.50, Air Canada stock potentially offers more than 50% upside. It’s clear that many analysts are paying more attention to its recovery potential and worrying less about its debt.

That’s bullish for investors today who are hoping for a rally. However, if market conditions worsen or Air Canada’s recovery faces more headwinds and uncertainty, this could negatively impact the stock again in the short run.

So, while there’s significant potential for returns as Air Canada’s operations recover, it’s still unclear at this time whether those potential rewards are worth the risk.

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 Daniel Da Costa has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Investing

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »