Earnings Alert! Is Air Canada Stock a Buy After its Q4 Results?

Here’s why I find Air Canada stock attractive to buy, despite its fourth-quarter earnings miss.

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Air Canada (TSX: AC) released its fourth-quarter and full-year 2023 financial results before the market opening bell on February 16. At first, these results may look like a mixed bag. Despite surpassing its annual financial targets and highlighting strong demand for air travel, the Canadian flag carrier’s adjusted net loss of $44 million in the fourth quarter was worse than Bay Street analysts’ expectations of around $17.6 million loss.

As of February 15, AC stock was trading at $19.26 per share with a market cap of $6.9 billion. This earnings miss could pressure or restrict AC stock’s upward movement in the short term.

But what do Air Canada’s latest results tell us about its long-term growth? Let’s find out by looking at some key highlights from its fourth-quarter earnings report.

Strong annual performance in 2023

Air Canada achieved a record full-year total revenue of $21.8 billion in 2023, reflecting a significant jump of 31.9% from 2022, driven by robust demand for air travel. This surge in revenue highlights the airline’s recovery trajectory and the effectiveness of its operational strategies.

The company’s operating income for the year stood impressively at $2.2 billion, marking a $2.5 billion improvement from the previous year. Similarly, its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of nearly $4 billion for the year more doubled on a YoY (year-over-year) basis. This adjusted annual EBITDA figure was also at the high end of Air Canada’s guidance range, showing operational efficiency and resilience.

The airline firm also posted a solid increase in its 2023 cash flows from operating activities to $4.3 billion and a free cash flow of nearly $2.8 billion. At the end of 2023, its net debt to adjusted EBITDA ratio improved dramatically to 1.1, down from 5.1 a year ago — showcasing a stronger fundamental with reduced debt levels.

But wider-than-expected quarterly loss

In the fourth quarter, Air Canada’s revenue rose 10.6% YoY to $5.2 billion, which also was close to its guidance. However, this was significantly lower than its revenue growth rate of 19.2% YoY in the previous quarter.

The largest Canadian passenger airline’s adjusted net quarterly loss of $44 million also missed analysts’ expectations, overshadowing its quarterly results. This loss could mainly be attributed to increased operational expenses and inflationary pressures, highlighting the challenges Air Canada continues to face in the post-pandemic recovery phase.

Is Air Canada stock a buy now?

Despite the fourth-quarter setbacks largely due to the ongoing macroeconomic conditions, Air Canada’s 2024 outlook remains optimistic. The airline plans to increase its ASM (available seat miles) capacity by about 10% YoY in the first quarter of 2024, indicating its continued focus on growth and market expansion.

Moreover, the company expects its full-year 2024 ASM capacity to be about 6 to 8% higher than in 2023. With this, it projects its adjusted EBITDA for 2024 to be between the range of $3.7 billion and $4.2 billion. These targets clearly reflect Air Canada’s continued efforts to navigate a tough economic period. That’s why, despite temporary challenges amid inflationary pressures, any short-term declines in Air Canada stock after its fourth-quarter results could be an opportunity for investors to buy it at a bargain for the long run.

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

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