Forget Boeing: Buy This Magnificent Airline Stock Instead

Boeing (NYSE:BA) stock is looking risky right now, but Air Canada (TSX:AC) stock? Much less so.

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Boeing (NYSE:BA) stock is currently going through a major correction. Since hitting its 52-week high of $264 on December 15, it has since fallen to $225 — a 15% decline. If it falls another 5% from here, the stock will be in a confirmed bear market.

Boeing’s problems stem from poor engineering decisions on some of its airplanes, which have led to crashes and deaths. Just this week, a controversy erupted when a 737’s control panel blew out mid-flight, leading to 171 Boeing planes being recalled. The matter still is not resolved.

The last few years have not been kind to companies involved in the aviation industry. Shares of aircraft manufacturers and airlines have both been hit hard, in many cases not recovering much from their March 2020 lows. That’s significant because March 2020 was the month when the world shut down in an attempt to stop the spread of COVID-19. No month in all of history was worse for the aviation industry. The fact that aviation stocks are still reeling from the damage when most industries have long since walked off the pandemic’s economic effects shows just how severe the impact was.

Nevertheless, there are aviation stocks that are worth buying. Their shares may still be down, but their actual business interests are doing well. History shows that buying such cheap stocks tends to pay off over the long run. In this article, I’ll explore one Canadian airline stock that’s definitely a better bet than Boeing right now.

Air Canada

Air Canada (TSX:AC) is a Canadian airline. It’s the country’s largest by fleet size and revenue and the only Canadian passenger airline that is publicly traded. Unlike Boeing, it is not going through any major scandals, and its earnings trajectory is positive. Despite all that, the stock is still down 61% from its pre-COVID highs.

A cheap valuation

One thing Air Canada has going for it right now is a cheap valuation. At today’s prices, it trades at the following:

  • 3.18 times earnings.
  • 0.32 times sales.
  • 12 times book value.
  • 1.74 times operating cash flow.

Apart from the book value multiple, these are all shockingly low. You might think that there has to be something going wrong at the company to justify this, but it appears that’s not the case. In the trailing 12-month period, AC had a 33% gross margin, a 10.5% net margin, a 5% free cash flow margin, and a 46% revenue growth rate. Scoring well on both profitability and growth, this company certainly doesn’t look like one whose shares should be trading at bargain bin multiples.

Good earnings results

To understand why Air Canada’s stock is still trading at very low levels, we need to look at what the company has been up to recently. We can catch a glimpse of it by looking at its most recent earnings release. In the third quarter, AC delivered the following:

  • $6.34 billion in revenue, up 19.2%.
  • $1.25 billion in net income, up 346%.
  • $3.09 in diluted earnings per share (EPS), up 317%.
  • $135 million in free cash flow, up from a negative figure.

That is pretty impressive growth. However, note that the growth in EPS was slower than the growth in net income. This implies that Air Canada issued shares and diluted its shareholders’ ownership percentages in the 12 months ended August 31. That’s not a positive, but with growth running way ahead of dilution, it doesn’t appear to be thesis breaking. On the whole, you could do much worse than buying Air Canada today.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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