Investing and trading in top-quality stocks at a lower value than their intrinsic value should be a key priority for long-term investors. Finding value stocks that have the potential to provide significant returns over time should be the goal. For many investors, Air Canada (TSX: AC) certainly appears to be one such stock worth considering right now.
Indeed, with a price-earnings ratio around 3 times, Air Canada’s stock is extremely undervalued by most conventional measures. However, this stock is one I’ve also said for a long time is likely cheap for a reason.
Let’s dive into why this is the case, and whether this top Canadian airline is a buy right now.
Air Canada’s financial picture
Air Canada is the largest airline service provider in Canada, serving more than 50 million passengers each year in collaboration with its regional partners. The company reported total revenue of $19 billion in 2019 and is one of the Star Alliance’s founding members, offering comprehensive coverage of air transportation to all.
The company released its Q4 and full-year financial results for 2023 on February 16. Impressively, the Canadian airline saw operating revenues grow roughly fourfold year over year, from $5.3 billion in 2022 to $21.8 billion last year. Unfortunately, the market sold off on the results, as investors appear to be focusing more on the company’s outlook than its financial results.
That can really be the only explanation to highlight why this stock is down as much as it is. Much of the company’s lower valuation is due to concerns about the future, with fuel prices remaining high and record demand expected to slow.
Is Air Canada worth a buy right now?
I think investors should certainly take these concerns at face value. It’s likely to be a difficult operating environment for airlines for some time. In addition to fuel costs and sky-high demand coming down, there’s also concerns around 737 planes and an overly indebted consumer that may be more reluctant to splurge on a long-haul international vacation (which is what many have been doing over the past year).
However, at the company’s current valuation, there’s also good reason for value investors to dive into the discount bin and consider adding this stock. At these levels, plenty of bad news is already priced in. So, if the worst-case scenario doesn’t materialize, demand remains relatively robust, and things continue as normal, this is a stock that should see some appreciation.
Air Canada’s large debt load has become a concern. But if interest rates come down, that could catalyze a move another leg higher. Thus, I think remaining cautiously optimistic about Air Canada makes sense. For those with a long enough investing time horizon, this value stock may certainly be a buy here.
