Is Air Canada a Buy, Hold, or Sell?

Air Canada (TSX:AC) stock is very cheap. Does that make it a buy?

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Air Canada (TSX:AC) stock has been extremely volatile ever since the start of the COVID-19 pandemic. Being forced to shut down several international routes and drastically cut down on domestic travel, Air Canada saw its revenue decline dramatically in 2020. It lost $4.6 billion that year, which was followed by another multi-billion dollar loss in 2021.

It’s been a long time since Canada did any COVID lockdowns, even on a local/provincial level. Still, the legacy of COVID lingers. Air Canada had to take on some debt – albeit low interest debt – to cope with the fact that barely anybody was travelling while the pandemic was at its peak. On top of that, there have been a few localized disease outbreaks since 2021 that some thought would turn into COVID-like pandemics. An example was 2022’s Monkeypox outbreak, which spread to many countries, stoking fears of COVID-like measures returning.

Nevertheless, Air Canada has returned to being profitable, and its revenue has surpassed 2019 levels. AC’s 2023 profit – $7.3 billion – was a record high. In this article, I will explore why Air Canada has recovered so well from its COVID “dark age,” and why its still-beaten down stock hasn’t followed suit.

Gains from re-opening

Air Canada has gained massively from the 2022 economic re-opening following the worst years of the COVID-19 pandemic. Revenue and earnings both hit new highs. Free cash flow ($2 billion) hasn’t quite gotten back to the 2019 peak ($2.6 billion), but it’s getting close. Finally, AC has used some of its newfound profits to pay off its debt, which is down $2 billion from the 2021 peak. It’s certainly not all bad news for this company, but there are some issues we’ll explore momentarily.

Valuation

One factor that Air Canada undeniably has going for it is its valuation. At today’s price (about $18.50), it is indisputably one of the cheapest major Canadian companies, trading at:

  • Three times earnings.
  • Five times forward earnings (estimated).
  • 0.3 times sales.
  • 8.3 times book value.
  • 1.5 times operating cash flow.

It’s practically unheard of for large companies that almost everybody in the nation deals with to get this cheap. So, there may be an opportunity here.

The bad news: Oil prices are rising

I think that, on a long-term basis, Air Canada stock is likely to do well. It’s cheap, it’s growing, and COVID lockdowns are a thing of the past. It all looks good. Still, there is one risk factor you’ll want to keep an eye on:

Oil prices.

Jet fuel comes from oil, and oil prices are rising. The Saudis and Russians have both curtailed output, and conflict in the Middle East is leading people to bet on higher prices in the futures market. All of this is taking the price of jet fuel higher, which is probably the reason why AC stock tanked on Friday. There are still people who think that oil will go to $300 and that entire industries will be upended by high energy prices. I myself think oil prices will be relatively high in the near future, but not extremely high. Air Canada will probably be fine.

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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