Prior to the COVID-19 pandemic, Canadian airline companies were on an absolute tear due to an extended period of low interest rates and low fuel prices. For instance, shares of Air Canada (TSX:AC) surged by a whopping 3,580% between January 2010 and January 2020. Comparatively, Cargojet (TSX:CJT) stock went public in January 2011 and returned over 1,000% in the next nine years.
Currently, Air Canada stock is down 53% from all-time highs, while Cargojet stock is trading 60% from record prices. Let’s see which beaten-down airline stock is a better buy right now.
The bull case for Air Canada stock
After three years of reporting multi-million-dollar losses, Air Canada is forecast to report adjusted earnings per share of $2.51 in 2023. So, AC stock is priced at 10 times forward earnings, which is quite cheap.
But as the airline sector is capital intensive, the company ended the first quarter (Q1) with a debt of $16 billion, while its cash balance stood at $8.5 billion.
Air Canada increased net debt by $542 million in 2022 to $7.5 billion. Its liquidity also fell to $9.8 billion in 2022, a decline of $700 million year over year due to capital expenditures and debt repayments.
But Air Canada is diversifying its revenue base as cargo revenue almost doubled to $1.3 billion in 2022, compared to 2019. It aims to increase the number of freighters to 12 in 2025, from three in 2023, which means its cargo sales should increase to more than $4 billion annually in the next three years.
The major risk of investing in Air Canada stock is its rising interest costs. Its interest expense stood at $896 million in 2022, up from $480 million in 2019. In the March quarter, interest expenses were $240 million or 20% of sales. So, the airline giant should use its profits to de-leverage the balance sheet, which might be difficult due to elevated inflation levels and high fuel prices.
But analysts expect Air Canada to end 2023 with adjusted earnings of $3.32 per share, which is 32% higher year over year. Bay Street remains bullish and expects Air Canada stock to surge over 20% in the next 12 months.
The bull case for Cargojet stock
Valued at a market cap of $1.7 billion, Cargojet reported revenue of $231.9 million in Q1 of 2023, which was below sales of $233.6 million in the year-ago period. However, its adjusted free cash flow remained flat at $42.5 million in the March quarter.
Cargojet explained that consumers shifted from buying goods to spending on services in a post-pandemic world, as they prioritized travel and leisure in the last year. The re-opening of economies resulted in pent-up travel demand, acting as a headwind for cargo carriers in the near term.
But these consumption behaviours should normalize in the second half of 2023, according to the company. Despite soft economic conditions in 2023, Cargojet believes secular macro trends should allow it to stage a comeback in the upcoming quarters.
It expects the growth in e-commerce and the slow death of shopping malls to result in air-cargo volumes. Priced at 20 times forward earnings, CJT stock trades at a discount of 50% to consensus price target estimates.