Is Air Canada a Buy After Earnings?

Air Canada (TSX:AC) has stock dipped more than 14% since the 2022 earnings were released. Is the stock a buy in the current macro environment?

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It has been a while since I talked about Air Canada (TSX:AC). The airline stock surged to $23 in the 2023 market recovery but fell 14% after its full-year earnings. What was in the AC earnings that caused this dip? And is the stock a buy at the current price? These are the questions that many who purchased the stock at $26 in March 2021 ask. 

Two things you should know before buying Air Canada 

Air Canada is not a bargain stock. This is not because the company’s fundamentals are weak but because the macroeconomic environment is too challenging. The airline’s struggles are not yet over. I am bearish on Air Canada and suggest you consider the following two things before buying the airline stock. 

What does Air Canada’s positive adjusted EBITDA mean to shareholders? 

Of all the key metrics in the earnings, only one is positive: adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization). Air Canada’s adjusted EBITDA improved from -$1.46 billion in 2021 to $1.46 billion in 2022. This figure excludes the two huge expenses of the airline: interest expense ($909 million) and depreciation and amortization ($1.64 billion). 

Let’s say you buy a boat for $1 million. Although depreciation is a non-cash expense, it is a way to expense the $1 million capital spent by buying the boat over the years. As Warren Buffett says about EBITDA, “Does management think the tooth fairy pays for capital expenditures?” Not adding depreciation is not the right way to look at a capital-intensive stock. 

While that was about depreciation, the interest expense is a cash expense. In an environment of accelerated interest rate hikes, you cannot avoid looking at that expense. The rising interest expense forced utility companies to slash dividends and reduce guidance.

Air Canada has a total debt of $24.7 billion, and its interest expense is close to $1 billion. And there is no way the airline can accelerate its debt repayment in the next two to three years. It may not be the right comparison, but the mounting debt pushed plane maker Bombardier into eight years of losses. 

Is EBITDA a good measure for airlines? 

EBITDA is a good fundamental measure for tech stocks that don’t have large capital expenditures or piling debt. It is not a good measure for Air Canada. Its $2.3 billion in interest and depreciation explains the net loss of $1.7 billion. AC’s 2023 adjusted EBITDA forecast of $2.5-$3.0 billion in 2023 and $3.5-$4.0 billion in 2024 is the management’s way of highlighting the positive.

As an Air Canada shareholder, you are eligible for the net income attributable to shareholders. Buying AC stock is like paying $20 for a $4.75 loss per share. From this angle, the stock doesn’t look attractive at its current price. 

Challenging macro environment 

Another thing to consider is the challenging macro environment. An airline spends an average of 20% of its revenue on fuel costs. But oil prices skyrocketed in 2022 and are likely to stay high throughout 2023 after the Russia-Ukraine war disrupted the global supply chain. Air Canada’s 2022 fuel expense surged 235% to $5.28 billion — almost 32% of the revenue. 

Rising energy prices increased inflation, and the Fed is increasing interest rates to curb demand and reduce inflation. The rising energy prices increased AC’s fuel expense, the interest rate hike increased its interest expense, and rising inflation has started to impact demand for discretionary items. Summing up, AC is on the road to recovery, but a challenging macro environment could delay the recovery. 

Time is of the essence here. AC is being cautious with its $9.8 billion liquidity, which can help it bear losses. It could see some months of cash burns and net income in this challenging macro environment. 

Is Air Canada stock a buy in 2023? 

Air Canada stock surged in February during peak season, but things could slow throughout the year. Till the airline delivers six consecutive quarters of net income, it is not a buy. You have options of better recovery stocks with stronger balance sheets that are buys this year. 

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 Puja Tayal 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.

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