At the start of the pandemic in early 2020, when Air Canada (TSX:AC) stock was impacted significantly by lockdowns and travel restrictions, it wasn’t surprising to see the share price decline significantly.
Even throughout the pandemic, as cheap as Air Canada stock was and as much popularity as it had from Canadian investors following it, it also wasn’t surprising to see it trading so low.
Even last year, when airlines began to see their operations recover rapidly due to pent-up demand from travelers, it still wasn’t surprising to see Air Canada struggle to rally, especially due to the worsening market conditions.
Now, though, with Air Canada’s operations well on their way back to pre-pandemic levels, it’s a little surprising to see it trade well off its pre-pandemic price.
Let’s look at why the stock continues to be so cheap, how much value it offers, and when it could begin to see a consistent rally.
Why is Air Canada stock still trading below $20 a share?
Before the pandemic, Air Canada traded right around and even slightly above $50 a share. Today, Air Canada stock trades below $20 a share — more than 60% off the pre-pandemic price.
It may seem surprising that Air Canada stock continues to struggle even though travel demand has recovered meaningfully. However, although revenue has picked up considerably, inflation is still heavily weighing on operations and impacting Air Canada’s profitability.
In 2021, Air Canada’s revenue was just under $6 billion. Then, as restrictions were lifted in 2022, it saw a significant increase in revenue, up 158.7% year over year to more than $15.5 billion. For reference, before the pandemic in 2019, Air Canada stock generated $17.95 billion.
Now, unlike the last few years, where the impact on revenue was the biggest worry for investors, today, the most significant issue that Air Canada stock faces is rising costs, as inflation continues to have a noticeable impact on operations.
For example, in its most recent earnings report for the fourth quarter of 2022, Air Canada stock reported adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $389 million compared to consensus estimates of $481 million — a nearly $100 million miss.
Furthermore, the stock reported a loss in adjusted earnings per share (EPS) of $0.61 compared to analyst expectations of a $0.29 loss.
That miss on EBITDA and adjusted EPS came after Air Canada stock reported operating revenue of $4.68 billion, which actually beat analyst expectations of $4.5 billion.
Although it’s clearly in a much better position than it was during the pandemic, with investors much more focused on its ability to generate a profit, it makes sense why Air Canada stock has yet to see a meaningful and sustained rally in its share price.
Bay Street thinks the airliner can rally by over 40% in the next year
Today, six analysts rate Air Canada stock a buy, while the other two covering it have hold ratings. Furthermore, the average analyst target price is upwards of $27 — a more than 40% premium to where it trades today.
The expectation from the market is that as inflation continues to cool off, costs will come down. Furthermore, due to the significant demand Air Canada is seeing, its pricing power should also help to offset these cost increases.
Until it can consistently become profitable again, though, it will be difficult for the stock to see a rally. And although it struggled in 2022, analysts expect it will continue to see an improvement throughout 2023 in its top line and profitability.
Right now, the expectation is that Air Canada will grow its revenue by nearly 24% year over year in 2023 to more than $20.5 billion. In addition, EBITDA is expected to grow over 87% this year, and, most importantly, Air Canada is expected to earn positive EPS this year of $0.69.
Therefore, if Air Canada can continue to execute well and its profitability does recover, there’s a major opportunity for investors considering the stock today. Plus, analysts expect its EPS to recover to more than $2.75 in 2024.
So, if Air Canada stock can execute well and see a meaningful increase in profitability, the stock has a tonne of potential to rally later this year and into 2024.
