Why I’m Changing My Mind About Air Canada Stock

With Air Canada stock trading just off its lows and expected to earn record revenue this year, is it worth investing in today?

| More on:
Aircraft wing plane

Image source: Getty Images

Air Canada (TSX:AC) stock has been on many investors’ radars since the start of the pandemic. The Canadian airliner, which traded above $50 prior to the pandemic, was one of the biggest losers as a result of all the shutdowns and closure of borders for non-essential travel.

In early January 2020, Air Canada stock hit a high of more than $52. Just two months later, in March 2020, the stock had fallen by more than 75%, creating a lot of interest for investors.

Yet despite all the interest in the stock and the fact it offered an unbelievable discount, it was clear early on that Air Canada was in for a multi-year struggle.

Not only did the effects of the pandemic last longer than many initially expected, but Air Canada’s operations were impacted significantly, with revenue in the first year of the pandemic falling by nearly 90%.

This made the situation dire for Air Canada stock, and in just two years, it took on more than double the debt that it had going into the pandemic. It was this debt and a slower recovery than many initially expected that made me believe Air Canada wouldn’t see a recovery for years, and I recommended investors avoid the stock.

Now, over four years after the pandemic first hit, the stock is still unbelievably cheap. In those last four years, the highest it has traded is just $31, still roughly 40% off its pre-pandemic high. And in the last 52 weeks, its high has only been $26.04. Not to mention, today, it trades just off its 52-week low of $16.04 at a current price of roughly $17.75.

So, with Air Canada stock still trading unbelievably cheap, here’s why I’ve changed my mind about it and think it’s one of the best stocks to buy now.

The Canadian airliner’s operations are recovering rapidly

One of the most significant reasons I recommended investors avoid Air Canada stock in the first few years after the pandemic hit was that its debt became extremely elevated, which pushed its enterprise value to insane levels.

Heading into 2020, Air Canada stock had just $5.2 billion of long-term debt on its balance sheet. By the end of 2021, that debt had ballooned to more than $12.8 billion.

Therefore, even if Air Canada stock had been able to see a quicker recovery in its sales, its heavy debt load would have likely still weighed on its share price performance.

Today, however, the stock is in a much different place. Not only did it generate record revenue in 2023, passing its 2019 sales for the first time, but it was also profitable in 2023 for the first time since the pandemic.

This is crucial because it not only shows the industry is recovering and gives investors confidence in Air Canada stock going forward, but those earnings and excess cash flow it generated now allow it to start significantly paying down all that debt it took on. In fact, as of the end of 2023, Air Canada’s long-term debt had declined to less than $11 billion.

When can Air Canada stock recover?

Predicting exactly when Air Canada will recover is tricky, especially in this market environment with so much uncertainty. What we do know is that it’s trading unbelievably cheap and won’t stay this low forever.

Furthermore, with its operations now essentially fully recovered and with the stock now focused on strengthening its balance sheet and paying down its debt, many of the headwinds preventing it from seeing a recovery rally have now dissipated.

Plus, looking forward, in 2024, analysts expect its revenue will rise another 5%. And while higher cost pressures have been hurting margins as a result of inflation, Air Canada stock is still expected to generate normalized earnings per share of $3.74.

Therefore, with Air Canada stock trading at a forward price-to-earnings (P/E) ratio of just 4.7 times, there’s no question that it’s unbelievably cheap. For comparison, in the three years leading up to the pandemic, Air Canada’s average forward P/E ratio was roughly 7.7 times.

So, if you’re looking for an ultra-cheap and high-potential stock to buy now, Air Canada stock is undoubtedly one of the best options.

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 Daniel Da Costa 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.

More on Investing

sale discount best price

Buy the Dip: 2 Strong TSX Stocks That Recently Went on Sale!

Consider buying Parkland Fuel (TSX:PKI) stock and another top dividend play on their recent corrections.

Read more »

A worker uses a double monitor computer screen in an office.
Dividend Stocks

TFSA Investors: 2 Winning Buy-and-Hold Forever Stocks in April 2024

Buy-and-hold stocks are easy enough to find if you limit yourself to dividends, but there are at least a few…

Read more »

worry concern
Dividend Stocks

Telus Stock Is Down to its Pandemic Low of Below $22: How Low Can it Go?

Telus stock is down 37% in two years and is trading near its pandemic low, making investors wonder how low…

Read more »

edit Businessman using calculator next to laptop
Energy Stocks

If You’d Invested $5,000 in Brookfield Renewable Partners Stock in 2023, This Is How Much You Would Have Today

Here's how a $5,000 lump-sum investment in BEP.UN would have worked out from 2023 to present.

Read more »

money cash dividends
Dividend Stocks

Portfolio Payday: 3 TSX Dividend Stocks That Pay Monthly

After adding these three TSX dividend stocks to your portfolio, you can expect to receive attractive monthly income for years…

Read more »

Dividend Stocks

The Top Canadian REITs to Buy in April 2024

REITs with modest amounts of debt, like Killam Apartment REIT (TSX:KMP.UN), can be good investments.

Read more »

edit Person using calculator next to charts and graphs
Stocks for Beginners

Where to Invest $7,000 in April 2024

Are you wondering how to deploy the $7,000 TFSA contribution increase in 2024? Here are four high-quality stocks for earning…

Read more »

Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

Some of the smartest buys investors can make with $500 today are stocks that have upside potential and pay you…

Read more »