Air Canada Stock: Will it Double in the Next Year?

Stuck below $20, Air Canada stock trades at very depressed multiples. Will earnings expectations come down or will its stock price rise?

Karen Thomas, MSc, CFA

Karen is a stock market enthusiast focused on uncovering those stocks that she believes the market has mispriced. She does this through fundamental and quantitative analysis of companies and their industries, as well as a study of future opportunities and trends. She holds a Masters degree in Finance, the CFA designation, and has over 20 years of experience in the investment management industry. Having worked at a major pension fund, as well as two leading mutual fund firms as an analyst and portfolio manager, she has solid investing expertise which she aims to share with her readers.

Published December 13, 2023 9:45 pm EST

Cyclical stocks like Air Canada (TSX: AC) are always going to be volatile, following the up and down cycles of their industry. Air Canada stock is currently trading under $18. This is 65% lower than pre-pandemic levels. In fact, it seems like the stock has been stuck around $20 for quite some time now, despite seemingly positive recent fundamentals.

Is Air Canada stock finally a buy at this time, and can it double your money in the next year?

Consumer spending faces a cliff

Any analysis of Air Canada stock must start with the state of the consumer and the economy. This is where I’ll start.

The macro-economic environment is pretty precarious these days. Rising interest rates and inflation are squeezing consumers, leaving them with less disposable income. This is a problem for Air Canada, because as we know, travel expenditures come from disposable income. So, if the consumer is cutting back on disposable income, air travel will invariably suffer.

Yet, 2023 has been a good year for Air Canada so far. Third quarter revenue, for example, increased 19% to $6.3 billion, and net income increased to $1.8 billion or $3.41 per share versus $1.07 per share. Passenger revenue hit a record, as demand soared above 2019 levels.

So why has Air Canada’s stock price remained below $20?

Air Canada stock pressured by macro headwinds

The answer to this question brings us back to consumer spending.

According to Air Canada’s management, advanced ticket sales were $4.5 billion in October, down 20% from June. This is in line with seasonal patterns and trends. So it’s nothing to be concerned about. In fact, in management’s latest update, they said they expect 2023 adjusted EBITDA will land in the high end of their guidance range, which is a very positive sign.

But last week, signs of a slowdown in consumer spending were accelerating. In the U.S., consumer spending rose a mere 0.2% in October after a 0.7% increase in September. Also, many retailers are giving cautious outlooks on consumer spending. For example, Walmart expressed concern as it saw consumer spending weaken recently.

For its part, Air Canada also struck a cautious tone as management sees big risks to disposable income. But as of October, demand was still strong in almost all markets. Coming out of the pandemic, Air Canada faces higher costs and a weaker consumer. However, the airliner has a diverse operating network, which gives it the ability to shift focus if there’s weakness in any market.

Air Canada stuck below $20

Air Canada’s stock price is trading at ridiculously low multiples of five times next year’s expected earnings. This is reflective of the many worries that are on investors’ minds regarding the macro-economic environment. It seems that many of us are skeptical that the estimates that are out there can be achieved.

So, Air Canada remains shunned by investors, who are not excited about the stock with all the risks that are out there. As for me, I remain on the sidelines, waiting for the right time to add it to my portfolio. I think it’s more likely that the stock will fall from here rather than go up. I don’t think a double is in the cards just yet, and I would wait for a better entry point if you’re thinking of buying.