It’s been another lacklustre year for shares of top Canadian airline Air Canada (TSX:AC), which is off just shy of 5% year to date. The stock is pretty much back to where it spent a large chunk of 2020 in the mid- to high teens. Undoubtedly, the outlook is a heck of a lot better today than they were during the days of pandemic lockdowns. Regardless, the stock can’t seem to gain any sort of traction. With a Canadian recession potentially around the corner, Air Canada may still have plenty of hurdles to tackle before it can sustain any sort of relief rally.
The company’s latest (third) quarter was really nothing to write home about for investors. Though revenues rose 19.2% to $6.3 billion, higher costs have continued to weigh heavily on profitability. Indeed, it’s painful to be an airline investor these days. From one headwind to another, it seems like Air Canada stock and the peer group may remain grounded for quite some time.
Air Canada shares weighed down by higher costs
The good news is that inflationary pressures (higher labour and fuel prices) won’t be sticking around forever. There is a light at the end of the tunnel as central banks look to put the finishing touches in their battle with higher prices. Though commodity prices are virtually impossible to predict, I think that a robust consumer could help Air Canada gain a bit of traction again, as the firm does its best to make the most of the tough hand it was dealt.
For investors, Air Canada (and almost any other air travel recovery play) has been a frustrating hold. The summer season was pretty good. And for a while, it seemed like Air Canada stock was finally ready to recover meaningful ground. Fast forward to today, and things are starting to look grim again, with the stock down around 30% from its 52-week high.
Although Air Canada’s management team can’t control the price of fuel, it has done quite a remarkable job of adapting to these horrid conditions. Despite this, the airlines will always be highly sensitive to the economy. And until the consumer is really feeling good again, I’m not so sure AC stock will be able to break out of its multi-year funk.
If you’re a patient investor who’s willing to embrace the turbulence for what could be another few years, Air Canada stock may be an intriguing contrarian play while it’s trading in the high teens. For everyone else, though, AC stock seems like dead money, as the firm is hit with headwind after headwind.
Air Canada: What about valuation?
Air Canada stock is quite tough to value. For the many investors who bought in, the name has been quite the value trap. At just 0.3 times price to sales, I view AC as a potential deep-value play. Of course, Air Canada’s cost woes and the weakening macro environment won’t disappear overnight. As such, do be sure you’ve got at least four years to wait for pressures to pass.
