The airline industry is a tough area to operate and invest in. In the case of Air Canada (TSX: AC) stock, it can make big moves up or down without warning. For example, it could make more profits when the economy is doing well and the stock could rise as a result. Here’s its long-term stock price chart to give a taste of its stock volatility.
AC data by YCharts
Technically, it means that investors could potentially target to buy AC stock at a low and profit on a pop from good news. However, it would be a more speculative investment because of its highly unpredictable nature.
Recently, Air Canada stock has taken a dive seemingly after it provided preliminary results for its second quarter (Q2) as well as updates for its full-year 2024 guidance.
The preliminary results for Q2 included operating revenue growth of 2% to $5.5 billion versus a year ago. Unfortunately, with a sharp cut of 6.4% in its operating margin, operating income came in at $466 million, which was down 42% year over year. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization), a cash flow proxy, of $914 million, was down 24%, with the adjusted EBITDA margin shrinking 5.9% to 16.6%. Not surprisingly, the airline stock reduced its 2024 guidance, including guiding down its adjusted EBITDA by about 18% to a range of $3.1 and $3.4 billion.
The negative results and outlook triggered a selloff of about 7% in the cyclical stock.
Interested investors who want to roll the dice and hope for a pop could wait for the stock to settle down, stop from falling, and perhaps consolidate a bit before taking a play position. The analyst consensus price target on Air Canada stock is $22.33, representing upside potential of almost 50% from the recent quotation of $14.90.
Exchange Income: A better airline buy
A better airline stock to potentially invest in is Exchange Income (TSX: EIF) in the sense that it makes more predictable cash flows and returns for its shareholders. Exchange Income is an acquisitive company in aerospace, aviation, and manufacturing.
In May, Exchange Income reported revenue and adjusted EBITDA growth of 14% year over year to $602 million and $111 million, respectively. Although it is also subject to the ups and downs of the economic cycle, it offers a nice monthly dividend, delivering stable returns to its investors.
It turns out the stock is also less volatile than AC stock, as shown in the graph below.
AC and EIF data by YCharts
Accounting for dividends, its total returns were much higher in the period.
EIF Total Return Level data by YCharts
Today, at $47.37 per share, the monthly dividend stock trades at a margin of safety. The analyst consensus price target represents a good discount of 24% or upside potential of almost 32%. Importantly, the stock pays out a fine dividend yield of close to 5.6%, which helps investors ride through market volatility. To be sure, Exchange Income has a track record of paying out stable and growing dividends. Its 10-year dividend-growth rate is 4.2%.
Exchange Income is set to report its Q2 results this Friday. Interested investors can wait for its latest results then before making a decision.
