The airline sector has endured an extremely difficult period since the start of the COVID-19 pandemic. Prior to the pandemic, Air Canada (TSX:AC) and its peers enjoyed a multi-year bull run in which airline stocks easily outpaced broader indices.
For instance, Air Canada stock surged 3,580% between January 2010 and January 2020. In this period, the TSX gained just 94%. However, right now, AC stock is down 62% from all-time highs, allowing you to buy the dip.
So, let’s see if Air Canada stock should be on top of your shopping list for March.
Is Air Canada a good stock to buy?
The airline sector is cyclical and capital-intensive. According to Warren Buffett, airline companies don’t provide any durable competitive advantage. So, while they may increase sales during periods of economic expansion, it is difficult to translate the growth into sustainable profits.
The airline sector is crowded, and companies need to keep reinvesting cash flows to increase passenger capacity, as well as add new traffic routes.
In the last three years, Air Canada raised billions of dollars in debt to support its high cash burn rates amid COVID-19. Despite pent-up travel demand and the reopening of economies, the airline is currently wrestling with higher interest rates and elevated oil prices.
Air Canada reported revenue of $16.6 billion in 2022, an increase of 160% year over year. Its net losses also narrowed to $1.7 billion from $3.9 billion. Analysts now expect the company to report sales of $20.1 billion in 2023 and $22.1 billion in 2024. Its adjusted earnings will also increase, to $2.66 per share in 2024 from a loss of $2.76 per share in 2022.
So, AC stock is priced at less than 0.3 times 2024 sales and 7.6 times forward earnings, which is very cheap. But it ended the last year with total debt of more than $16 billion and $2.4 billion in operating cash flows. So, a significant portion of the company’s profit margins will go towards interest payments in the near term. Its interest expenses totaled $909 million in 2022, an increase of 21% year over year.
We can see that Air Canada’s compelling valuation makes it attractive to investors. But there are macro risks that may impact its revenue and profit margins in the next four quarters.
What next for AC stock price and investors?
Air Canada expects its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) to range between $2.5 billion and $3 billion in 2023, an increase of 88% year over year, given midpoint forecasts. Management also is optimistic about ending 2024 with an EBITDA of around $3.8 billion.
For Air Canada to keep improving its profit margins, the company will largely depend on the rebound of global travel to maintain its momentum despite the prospect of an economic slowdown.
Air Canada reported record sales of $19.1 billion in 2019. These numbers are expected to be breached this year, allowing the airline giant to improve its balance sheet and stage a comeback on the TSX.
Analysts remain bullish on AC stock and expect it to gain around 40% in the next 12 months.
