Better Buy: Air Canada Stock vs. Cineplex

Air Canada and Cineplex stock both trade at attractive valuations, but in this uncertain environment, here’s the stock that is the best to buy.

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Investors have a tonne of interest in the recovery potential that both Air Canada (TSX:AC) and Cineplex (TSX:CGX) stocks offer in this opportunistic investing environment. The market has been waiting for these two stocks to recover for years after both were severely impacted by the pandemic.

And now, after years of trading dirt cheap, both stocks are seeing their operations pick back up rapidly, leading to significant recovery potential for each stock.

But although both stocks certainly offer potential, let’s look at which stock is the better buy today.

Where are Air Canada stock and Cineplex in their recoveries?

When it comes to evaluating both stocks and the potential for capital gains as their operations recover, most investors and analysts are comparing the numbers like revenue and earnings that these stocks are reporting to their numbers in 2019 — the last normal year before the pandemic hit in early 2020.

And so far, while both are now well into their recoveries, it appears as though Air Canada stock is closer to seeing its operations back at 2019 levels than Cineplex is.

Over the last 12 months, Air Canada stock reported $16.6 billion in revenue — roughly 87% of its sales in 2019. Furthermore, analysts estimate that in 2023 it will see sales climb to over $20 billion, surpassing 2019.

Meanwhile, Cineplex stock reported just under $1.3 billion in revenue in 2022, which was 76% of its sales in 2019. That’s a significant recovery compared to where it was in 2020 and 2021 but is still behind Air Canada stock.

Furthermore, while Air Canada stock is expected to exceed its 2019 sales this year, Cineplex isn’t expected to see its revenue fully recover until 2024. Currently, analysts estimate Cineplex will see sales of $1.55 billion this year, which would be 93% of the sales it did in 2019.

Revenue is a strong indicator of how these stocks are recovering, but it’s also important to look at the profitability these stocks are generating to see if the business operations continue to be impacted.

And although Air Canada stock has seen its revenue recover faster than Cineplex, it’s also seen much higher costs and, therefore, lower margins than it did in 2019.

In fact, despite seeing a major recovery in its revenue, Air Canada stock still reported negative earnings in 2022 and isn’t expected to see its earnings per share (EPS) reach 2019 levels until 2025. In 2023, it’s expected to earn $0.72 in normalized EPS.

Cineplex, however, is expected to earn normalized EPS of $0.50 this year and $1.00 next year. And that’s compared to its normalized EPS of $0.58 in 2019.

Which stock is the better buy today?

Although the travel sector has rebounded rapidly and Air Canada’s revenue is recovering well, it’s clear the stock still faces significant headwinds and increased costs, especially after the pandemic impacted it so badly and it was forced to take on so much debt.

Plus, in addition to the impacts Air Canada stock faced from the pandemic, its stock has also performed better than Cineplex’s since the start of 2022, down just 6.4% compared to Cineplex, which has lost over 41% of its value.

This underperformance by Cineplex is making its stock look much cheaper, and with many expecting Cineplex to see its profitability rebound faster than Air Canada, it certainly looks like the better stock to buy now.

Currently, Air Canada trades at a forward price-to-earnings ratio (P/E) of 27.8 times. Cineplex, however, has a forward P/E ratio of just 16 times today.

Therefore, although both stocks have excellent potential to rally over the coming years, considering the headwinds Air Canada stock is still facing, in addition to the fact that it also looks more expensive, Cineplex appears to be the better buy today.

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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