Air Canada (TSX:AC) stock dived by 8.4% on Thursday, May 2, after its first-quarter earnings miss disappointed investors, erasing nearly all its year-to-date gains. Notably, this was AC stock’s worst single-day performance in more than 14 months. With this, it now trades at $18.75 per share with a market cap of $6.7 billion.
Before I try to answer the question of whether Air Canada stock is a good buy now, let’s take a closer look at the largest Canadian passenger airline company’s fundamentals and what caused the earnings miss.
Air Canada’s first-quarter 2024 earnings missed estimates
In the first quarter of 2024, Air Canada’s operating revenue rose 6.9% YoY (year over year) to $5.23 billion, exceeding Street analysts’ expectations by a narrow margin. The airline’s revenue growth was a direct result of an 11% YoY increase in its operated capacity, which shows its proactive measures to expand its service reach and cater to increasing passenger demand.
However, Air Canada reported an adjusted net loss of $0.27 per share for the quarter compared to an adjusted net loss of $0.53 per share a year ago. Despite a significant reduction in its quarterly losses on a YoY basis, its latest quarterly loss figure was much wider than the analysts’ estimate of $0.07 per share, which could be the primary reason why Air Canada’s share prices fell sharply after its earnings came out.
But these positive developments are worth noting
One of the key factors that I found interesting in Air Canada’s latest quarterly earnings report was its strategic management of costs and efficiency improvements. Despite its significantly expanded operations leading to a 6% YoY rise in its first-quarter operating expenses, the airline company showed its ability to maintain a low adjusted cost per available seat mile (CASM) of 14.76 cents, which only rose by 1.6% from its adjusted CASM of 14.52 cents a year ago.
Another important factor that I found impressive in Air Canada’s latest quarterly report was its robust financial health and cash flow generation. Despite the challenging macroeconomic environment, the airline company managed to generate over $1 billion in free cash flow, up 7% YoY. This was mainly driven by its strong operational activities and advanced ticket sales, showcasing its ability to preserve cash and reduce its cash-burn rate even amid an uncertain macroeconomic environment. This financial strength is further underscored by the airline’s improved leverage ratio, which stood at 0.9 at the end of the March quarter, down from 1.1 at the end of the previous year.
Is Air Canada stock a good buy now?
In my opinion, Air Canada stock could be a risky bet if you want to see your invested money grow exponentially in the short term. However, given the positive signs of Air Canada’s resilience and continued post-pandemic recovery from its latest quarterly results, I believe that the stock is a good buy on the dip now for long-term investors. The Canadian flag carrier has demonstrated its ability to adapt to the changing market conditions of late, as well as its financial position and cash flow generation remain strong.
Moreover, despite posting a spectacular financial recovery in the last few years, Air Canada stock is still down more than 60% from the pre-pandemic year 2019’s closing level of $48.51 per share. This makes it look way too undervalued, with huge upside potential for investors who are willing to hold AC stock for the long term.
