As the pandemic caused a complete lockdown on international and domestic air travel, airline stocks worldwide saw their operations come to a screeching halt. Being the flag-carrying airline in the country, Air Canada (TSX: AC) has seen some of its worst years after its formation during the pandemic.
Between January 17, and March 20, 2020, the airline stock lost 75% of its value on the stock market. As of this writing, Air Canada stock trades for $17.91 per share, still closer to its COVID-19 lows than its pre-COVID highs. At current levels, it is down by over 31% from its 52-week high.
Air Canada stock might seem like it is in trouble. However, the airline’s fundamentals paint a different picture than its performance on the stock market suggests. At current levels, Air Canada stock trades at 2.98 times earnings and 0.31 times sales, suggesting a cheap valuation for the battered airline stock.
Source: Getty Images
Are things getting better for the airline?
Granted, the valuation seems cheap on paper. Still, it does not necessarily mean it translates to immediate returns for investors. Air Canada’s cheap valuation suggests that it can provide significant wealth growth to its investors. The company’s fundamentals are seeing some improvements lately, generating $19.8 billion in revenue, $2.2 billion in earnings, and $6.31 per share in earnings in the last 12 months.
Despite the strong performance, Air Canada stock did not see its share prices budge upward last year. While it continues underperforming the rest of the market, its business is technically doing better. For savvier investors, investing in a business doing well but trading at a discount makes sense.
Not yet clear of trouble
While the demand for air travel has recovered, fuel prices have also reached new heights. With fuel getting increasingly expensive, operating costs for airlines across the board rise. Higher fuel prices might be one of the reasons people have sold off Air Canada shares this year. With jet fuel being one of the biggest expenses for airlines, rising fuel prices put immense pressure on airlines.
With fuel prices falling earlier in the previous quarter, the company’s performance improved. However, the price hike in fuel was sustained long enough to make Air Canada shares decline. Despite an improved performance by the company, the share prices have not recovered.
Foolish takeaway
Considering everything, Air Canada does seem like a decent stock to invest in today. The company is performing well, bringing in lots of revenue. If oil prices remain lower in the coming months, the financial pressure mounting on the battered airline stock might ease up, allowing Air Canada to do better on the stock market.
While it might seem like a good time for a turnaround for Air Canada, I would still suggest being cautious with how much you invest in this high-risk Canadian airline stock right now.
If you do invest in the airline stock, remember that you might not see positive price movement for Air Canada on the stock market soon. The stock has given its investors a difficult time since the pandemic struck, but it might become a good rebound play soon.
