After rallying 30.5% in the second quarter of 2023, Air Canada (TSX:AC) turned negative again in the third quarter, losing nearly all its gains from the previous quarter. AC stock lost nearly 22.4% of its value in the September quarter, as it currently trades at $19.22 per share without any major change on a year-to-date basis, once again driving its market capitalization down to below $7 billion. By comparison, the TSX Composite benchmark ended the third quarter with a 1.9% decline.
Air Canada’s recent declines have worried investors who have been long waiting for a sharp recovery in its share prices. But in this article, I’ll explain why this downside correction could be an opportunity for long-term investors to consider buying AC stock at a big bargain.
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Air Canada stock
Interestingly, Air Canada was among the most popular Canadian stocks until the end of 2019 due mainly to its impressive financial growth trends and stock price movement. To give you an idea, the Canadian flag carrier’s total revenue increased by 44% in five years from $13.3 billion in 2014 to $19.1 billion in 2019.
More importantly, its adjusted annual earnings in these five years grew positively by 86%, from $1.81 per share to $3.37 per share. Similarly, its profit margins also gradually expanded during this period. Air Canada’s adjusted net profit margin stood at 4.8% in 2019, higher than 4% in 2014. These impressive growth factors could be the primary reason why AC stock caught investors’ attention by soaring more than 300% in these five years.
However, everything changed rather quickly for Air Canada investors in March 2020 after the World Health Organization declared COVID-19 a global pandemic, forcing countries to impose strict restrictions on physical activity. As expected, like tourism and hospitality, the airline industry was affected by these restrictions. These concerns led to a 67.5% value erosion in AC stock in the first quarter of 2020.
Is it the time to buy Air Canada stock in bulk?
After the March 2020 quarter, Air Canada stock has been on a roller-coaster ride, keeping its investors on their toes. But this volatility, in my opinion, has made the stock look highly undervalued. Let me quickly explain that.
The global pandemic’s negative impact on the company’s financials could be highlighted as the biggest reason why AC stock crashed in 2020. While extended travel restrictions due to new coronavirus variants continued to hurt the air travel demand in 2021, the demand has strengthened significantly in the last year. That key factor helped Canada’s largest passenger airline company reduce its annual adjusted net loss to $2.76 per share in 2022 from a loss of $9.66 per share in the previous year.
In the first half of 2023, Air Canada’s revenue jumped 57.4% year over year. Going forward, Bay Street analysts expect its 2023 annual earnings to be around $3.76 per share, even higher than pre-pandemic 2019’s adjusted earnings of $3.37 per share. Despite solid air travel demand and the company’s ongoing strong financial recovery, AC stock hasn’t seen any appreciation, making it look really attractive to buy in bulk right now to hold for the long term.
