Investing in airline stocks can sometimes be volatile, but also, at times, such stocks offer impressive returns to investors. One such airline I’ve been following closely in recent years is Air Canada (TSX: AC). After plunging following the pandemic, Air Canada stock has since rebounded nicely off its lows.
However, of late, Air Canada has been trading relatively rangebound, with investors unsure as to whether a breakout and growth-oriented rally will materialize or if new lows could be in order for the company.
Let’s dive into the bullish case behind why Air Canada may be worth considering in 2024 for those with a staunch value focus.
Air Canada’s positioning remains strong
Air Canada is the flagship Canadian carrier and, by far, the largest airline company in Canada. The airline serves approximately 50 million passengers every year with regional partners. Air Canada recently reported impressive operating revenue of $21.38 billion for 2023 and pumped out $2.28 billion of operating income for the year. Thus, at a market capitalization of only $6.5 billion at the time of writing, this is a stock that’s trading at less than three times operating income.
That’s dirt cheap, and it’s certainly a metric that’s hard to ignore.
Now, there are reasons for this very low multiple. Growth in international travel depends on continued strength from the consumer, which thus far has held up well in a period of interest rate hikes. However, if we do see a recession, oil prices (and therefore jet fuel costs) surge, or travel demand decreases for any reason at all, this airline’s valuation could come into question.
That said, Air Canada’s impressive fundamental metrics, including free cash flow growth from $1.96 billion to $2.76 billion year over year, are encouraging for long-term investors. At current levels, the stock looks cheap. If Air Canada is able to pay down its debt load and grow its cash flow over time (and perhaps instate a dividend), the bull thesis is easy to understand right now.
So, is Air Canada a buy or not?
I’m of the view that it’s best to be cautious in this current macro backdrop. Yes, Air Canada is cheap. In fact, it looks dirt cheap at current levels. However, it’s among the most highly cyclical names on the TSX. And while rumours of Air Canada’s demise (via a recession) appear to have been greatly exaggerated, just because we haven’t been hit with economic turmoil doesn’t mean it won’t happen.
Right now, I’m on the fence with Air Canada stock. I think certain value-conscious long-term investors can justify buying it here. But those with a more near- to medium-term outlook may want to be careful.
