Air Canada (TSX:AC) has been one of the worst-performing Canadian stocks over the last five years. Down 57% in a period in which the broader markets have risen, it has chronically underperformed. Amazingly, this underperformance has occurred despite a period of rising earnings for the company.
After losing about $4 billion in 2022, Air Canada’s earnings steadily recovered in 2022 and 2023, to the point where it is now earning more than it did in 2019, before the COVID-19 pandemic hit Canada. Despite this, the stock trades at $16.99, while it traded at $54 before the pandemic. The question is, why isn’t Air Canada re-taking its previous valuation?
Buffett sold
The reason why airline stocks in general, and Air Canada in particular, remain down for the count is because sentiment toward the sector is poor. A possible reason for that is the fact that Warren Buffett sold airline stocks during the COVID-19 pandemic.
Warren Buffett is one of the most influential investors in the world. He is the wealthiest stock market investor ever, and widely considered to be one of the best of all time. His moves are widely copied by investors the world over, including managers of large and influential institutional funds. The mere fact of him not liking a particular investment can result in that investment being out of favour for a long time.
Buffett sold airline stocks in 2020 because he thought that the pandemic made them too risky. Shortly after Buffett sold, the airlines did lose money for a prolonged period of time. At the time, his move looked prudent. However, the airlines quickly recovered to their pre-COVID revenue and earnings levels. There has been no recent talk about bringing back COVID-19 public safety measures . It would appear the markets are being too pessimistic about airlines.
Valuation
The reason why I think AC stock and other airlines are mainly trading based on Buffett’s vote of non-confidence is because they have gotten outrageously cheap yet still nobody’s buying. At today’s prices, Air Canada trades at a mere 2.9 times earnings and 1.4 times operating cash flow. It’s probably one of the cheapest major companies in Canada. And, its revenue and earnings are both growing. The long-term opportunity is certainly there. The only question is how long it takes for the markets to finally realize it.
Foolish takeaway
Air Canada stock has taken investors on a wild ride over the years. It crashed from $55 all the way down to $12 during the pandemic. It then recovered to $29 when the vaccine was announced, and crashed all over again from that level.
Holding this stock is a test of patience, to be sure. But the long term looks much rosier than the recent past. None of the risks facing Air Canada today – rising oil prices, customer complaints, etc. – are anything like the COVID-19 era catastrophe that took the stock below $20 in the first place. Trading at about three times earnings today, AC stock looks like a compelling opportunity.
