Is Air Canada Stock Finally a Buy This Season?

When you are investing in a prospective recovery, it’s a good idea to watch for favourable industry trends.

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The bear market phase varies greatly among stocks, even in extreme market conditions. Take COVID as an example. When it triggered the 2020 crash, a few stocks barely budged, while others lost half their value in a matter of months. The recovery phase was also different. Some stocks, even entire sectors and industry segments, recovered in a few months, while some took more than two years.

There are a few stocks that have yet to recover from the pummeling they got during the COVID, and one of them is Air Canada (TSX:AC). Canada’s premier airline is trading at a 61% discount from its pre-pandemic peak, and it has been hovering around $20 for years now.

At this price and with the assumption that it will reach its pre-pandemic peak when it fully recovers, Air Canada is quite an attractive pick, but only if recovery is just around the corner rather than multiple quarters or even years away.

The past and present

Air Canada’s decline was triggered by more than just a weak stock market. The pandemic directly impacted the business model of the airline, and for several quarters, it bled money at the rate of several million dollars a day. The fleet was reduced to a fraction of its original number because the demand was so low, and the airline had to cut many local and international routes.

Despite making a decent operational recovery in 2022, the financial losses continued till the end of the year. About 37 million people flew Air Canada, and the company generated about $14.2 billion in revenue in 2022, but it still incurred an operating loss of about $187 million.

However, the company has started turning things around. In the second quarter of 2023, it generated an operating income of about $802 million.

The future

The future looks relatively bright for the airline industry as a whole. Air travel is back to normal, and airlines across many countries have already hit their pre-pandemic numbers. Unfortunately, if the 2022 numbers are any indication, the company is far behind the peak. It transported over 51 million people in 2019, and the 37 million number pales in comparison.

That said, its financial recovery is a strong sign that the company is finally on the right track. It’s also growing its cargo business rapidly, which may allow it to diversify its revenue streams further in the future.

It’s important to understand that despite its financial trouble and poor debt management, it’s still the largest Canadian airline with a sizable international reach. There is competition, especially in the domestic market, but Air Canada is still the giant in Canadian air.

Foolish takeaway

A positive earnings result should have been a good catalyst for starting a recovery journey or at least a temporary bull market phase. But since it hasn’t, a mildly good season may have a relatively low chance of triggering a recovery. But you should keep an eye on the stock and positive market sentiment, so you are well positioned to buy it at the beginning of a bullish phase.

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 Adam Othman 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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