Air Canada (TSX: AC) stock has been one of the worst-performing TSX stocks over the last three years. It started off 2020 at $51, then abruptly crashed to $12.50, a stunning 75% decline. Today, the stock trades for $17.82, so it’s closer to the COVID-19 lows than to the pre-COVID highs.
It’s interesting that Air Canada stock is trading like this, because the company unquestionably has more fundamental value than its stock price betrays. At today’s prices, Air Canada stock trades at the following:
- 3.9 times earnings
- 0.3 times sales
- 1.6 times operating cash flow
- 2.65 times free cash flow
This is an extremely cheap valuation. It suggests that when you buy AC stock today, you’re paying for just 2.65 years’ worth of distributable cash. That’s a cheap stock! Now, of course, Air Canada doesn’t pay a dividend just yet — the cash isn’t being returned. But it may eventually get to the point where it can buy back shares, and that could get AC stock to a level where it’s really rallying. So, there’s reason to believe that Air Canada’s fundamentals can be transformed into real wealth for shareholders one of these days.
Improving fundamentals
One reason to think that Air Canada’s fundamentals can be turned into real shareholder wealth is the fact that said fundamentals are improving. In 2020, Air Canada’s revenue declined 80%, and it lost $4.6 billion. In the trailing 12-month period, by contrast, the company achieved the following:
- $19.8 billion in revenue, up 46%
- $2.2 billion in earnings, up from a loss
- $6.31 in earnings per share, up from a loss
As you can see, Air Canada delivered extremely good growth metrics in the third quarter. Still, the stock didn’t react much. Today, it’s down from the levels it traded at for much of late 2021/early 2022. So, the stock is getting cheaper while the business is performing better. That tends to be a winning combination.
High fuel prices
One reason why some people may have sold Air Canada stock this year is because fuel prices increased. Early in the second quarter, West Texas Intermediate crude started rallying, at one point getting all the way to $95. It was a pretty good showing for oil, but it was bad news for airlines. When oil prices go up, jet fuel prices go up. Jet fuel is the single biggest expense for airlines, so the impact of oil prices on them can be immense.
Fortunately, by the third quarter of this year, oil prices were coming down again. AC attributed the decline in jet fuel prices to its rising operating income in the period. Still, the jet fuel question reared its ugly head for long enough that AC shares fell. For whatever reason, they never recovered. So, AC might be a good buy right now in anticipation of a future recovery. Oil prices remain relatively low compared to the year’s highs.
Foolish takeaway
Taking everything into account, I would say that Air Canada stock is a decent buy today. I don’t own any myself, but I wouldn’t imagine that people buying it will get ripped off. The stock has given investors a difficult ride over the last three years, but today, it may be finally ready for a turnaround.
