After generating multifold returns in the decade prior to the COVID-19 pandemic, Air Canada (TSX: AC) stock has trailed the broader markets by a wide margin. Between January 2010 and December 2019, AC stock surged a staggering 3,580% as interest rates were low and the economy was expanding at a consistent pace.
But the COVID-19 pandemic forced countries to shut their borders, resulting in massive losses for capital-intensive airline companies, including Air Canada. In order to offset their cash burn rates, Air Canada and its peers increased balance sheet debt considerably.
Moreover, to support individuals and households amid the pandemic, several governments disbursed cash, which drove inflation to multi-year highs in 2022. Now, to offset inflation, federal banks hiked interest rates, resulting in higher debt costs for capital-heavy sectors such as airlines, utilities, industrials, energy, and real estate.
Despite the reopening of economies, Air Canada has wrestled with steep interest rates, inflation, and sluggish consumer spending. Due to these headwinds, AC stock still trades 64% below all-time highs, valuing the company at $6.7 billion by market cap.
Is Air Canada stock a good buy right now?
Air Canada is the largest airline in the Canadian market. In 2019, it was recognized among the top 20 largest airlines in the world. It reported revenue of almost $20 billion in 2019, which nosedived to $5.8 billion in 2020 and $6.4 billion in 2021. Moreover, its operating losses between 2020 and 2021 amounted to $6 billion.
In Q3 2023, Air Canada reported sales of $6.3 billion, an increase of 19% year over year, as it remains focused on growing its international network in a post-pandemic world. The airline giant ended Q3 with an operating income of $1.4 billion, an increase of over 100% year over year. Air Canada’s adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) grew by $773 million year over year to $1.8 billion, indicating a healthy margin of 29%.
While Air Canada experienced solid top-line growth, the company’s focus on lowering its cost base meant operating expenses rose just 5% compared to a 10% increase in capacity.
Its widening profit margins and cash flows enabled Air Canada to lower balance sheet debt. For instance, it ended Q3 with a leverage ratio of 1.4 times compared to 5.1 times at the end of 2022. Air Canada also reported total liquidity of $10 billion, which includes $8.3 billion in cash and $14.4 billion in total debt.
What is the target price for Air Canada stock?
Air Canada’s free cash flow in the last nine months totaled $2.1 billion, providing it with enough flexibility to strengthen its balance sheet and reinvest in growth projects. In the year-ago period, its free cash flow totaled less than $500 million.
Analysts tracking the stock expect Air Canada to report earnings per share of $4.56 in 2023, compared to a loss of $2.76 per share in 2022. So, priced at 4.1 times forward earnings, Air Canada stock is really cheap. Bay Street remains bullish and expects Air Canada shares to surge over 50% in the next 12 months.
