Can Air Canada Double in 5 Years? Here’s What it Would Take

Air Canada (TSX:AC) stock has gone nowhere since 2020. Can this change?

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Air Canada (TSX:AC) stock has essentially gone nowhere since the worst months of the COVID-19 pandemic. Its peak price in 2020 was $22, which was around when the vaccine was announced. There hasn’t been a single lockdown in Canada since 2022. Air Canada’s business has been booming, and yet AC stock is trading below the levels it traded at when it was losing billions a year due to COVID-19 travel restrictions.

Today, Air Canada is profitable and growing rapidly. Once this information becomes more widely known, the stock could rise in price. But could it double in as little as five years? In this article, I will explore whether that’s possible.

It’s certainly possible

It would certainly be possible for Air Canada stock to double in five years. The stock rose 4,000% from its 2000s lows to its pre-COVID highs. Doubling from today’s level would be nothing in comparison to that feat. So, Air Canada could double in five years. However, just because something is possible doesn’t mean it’s likely. In order to gauge whether it’s likely for Air Canada to double in five years, we need to look at the company’s performance.

Revenue growth

Air Canada has enjoyed very high revenue growth in the last 12 months. In that period, its revenue grew 46%. In its most recent quarter, the company’s revenue grew 19%. So, the revenue growth is certainly there. Maybe there’s a problem with profit? I’ll explore that question in the next section.

Earnings growth

To explain Air Canada’s lacklustre stock price appreciation since 2020, we need to look at something other than revenue — that’s been doing really well. Earnings are one possibility. It certainly took Air Canada longer to swing profitable after the initial COVID-19 lockdowns than it took for its revenue to recover. Maybe the company’s earnings are still the problem?

It isn’t. In the last 12 months, Air Canada’s earnings before interest, taxes, depreciation, and amortization (EBITDA) grew 384%. Operating income doubled, and net income grew to $1.25 billion, up from a negative figure. So, the profits are there, and they are growing. Could the problem be that there simply isn’t enough profit for each dollar of revenue the company generates? Were there a problem with that metric (known as “profit margin”), then investors would be justified in fearing that AC will become unprofitable again, just like it was at the peak of COVID-19.

Margins

Air Canada’s margins do not explain its poor stock performance any better than its revenue or earnings growth. In the last 12 months, its gross margin was 33%, its operating margin was 10%, and its net margin was 10.6%. “Gross,” “operating,” and “net” refer to different kinds of profit, while “margin” refers to the ratios of these profit metrics to revenue. Air Canada’s margins are all quite high. So, it’s not a lack of profitability that is holding its price back.

The bottom line

The bottom line on Air Canada is that its stock appears to be performing poorly for reasons unrelated to its business performance. There are some hypothetical issues that could arise here; for example, a spike in jet fuel prices could cause a decline in profit. However, those are extreme worst-case scenarios. On the whole, there is nothing unreasonable about thinking that Air Canada could double in five years.

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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