Better Buy: Air Canada Stock vs. Cineplex

Both Cineplex and Air Canada stock are still cheap. But given their risks as well as the potential upside, one is certainly a better buy today.

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Since the pandemic hit nearly three years ago, two of the most popular Canadian stocks have been Air Canada (TSX:AC) and Cineplex (TSX:CGX).

While many companies sold off significantly at the onset of the pandemic, it quickly became apparent that Air Canada and Cineplex would suffer some of the biggest and longest impacts on their operations.

Therefore, when these stocks sold off by more than 50%, it soon became clear that they could offer major gains when they eventually recovered.

The recoveries have lasted much longer than many initially expected for both Air Canada and Cineplex stock, though.

While Air Canada has made some gains recently, it continues to trade more than 50% below where it was before the pandemic, when it traded above $50 a share.

Cineplex has struggled even more. At the time of the pandemic, it was on the verge of being bought out by Cineworld for $34 a share. Today, Cineplex trades around $8 a share, more than a 75% discount from its pre-pandemic price.

But while many of the restrictions caused by the pandemic have eased, these stocks now face rapidly rising inflation and a potential recession later this year.

So let’s look at which is the better buy today, Air Canada stock as the airline industry continues to see impressive demand, or Cineplex due to its massive discount to its pre-pandemic price.

Air Canada stock

As travel restrictions have been lifted, there’s been no shortage of media coverage on how busy and popular airline travel is again. And while it’s caused some headaches for the airlines, all that pent-up demand has been a significant boost during their recoveries.

Many investors were worried that rising inflation and rising costs would severely impact airlines’ ability to recover from the pandemic. However, the significant demand from consumers resuming travel has given airlines like Air Canada the pricing power to offset many of these increased costs.

Therefore, we’re seeing a stronger and quicker recovery than many expected. As a result, Air Canada stock has a tonne of momentum and the potential to continue increasing its profitability and ultimately driving its share price higher through 2023.

Of course, there are still a lot of risks to consider, though. For example, while Air Canada is now reporting positive earnings before interest, taxes, depreciation and amortization (EBITDA), it’s still facing a net loss on its bottom line.

However, most analysts expect it will begin more consistently earning a profit by the second half of 2023.

Cineplex stock

While impacted similarly to Air Canada by the pandemic, Cineplex is in a much different position. It also offers a discretionary service, but it’s much cheaper to go to the movies and, historically, box office numbers haven’t been impacted that severely by recessions.

One of the major problems that Cineplex has faced that continues to impact its recovery is that it relies on the film industry for content. After the pandemic affected many studios and the entire industry so severely, it’s taken Cineplex much longer to recover. The prolonged recovery is why its share price continues to struggle.

In the stock’s most recent quarter ending September 30, 2022, the movie house reported sales of just $340 million. That was year-over-year growth of more than 35%. However, it was still well off pre-pandemic comparable revenue of $418 million, showing that Cineplex still has a way to go before it can recover.

One main positive from its most recent earnings report is that its amusement segment has recovered well and actually reported record revenue from its locations like The Rec Room. This shows that Cineplex’s operations are still seeing strong demand. Once the film industry fully recovers, its box office numbers should follow suit.

Therefore, with Cineplex trading ultra-cheap, at a forward enterprise value (EV)-to-EBITDA ratio of just 6.6 times, it offers investors an attractive buying opportunity. Before the pandemic, the stock traded at an EV-to-EBITDA ratio of roughly 9.5 times.

Clearly, both Cineplex and Air Canada offer significant upside potential. Although both do have considerable risks to consider. Yet, given that Cineplex looks to be on the verge of recovery and still trades heavily undervalued, I’d give it the edge as the better of the two to buy now.

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 recommends Cineplex. The Motley Fool has a disclosure policy.

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