On Wednesday, Air Canada (TSX:AC) released its earnings for the fiscal second quarter. The release beat on revenue and was about in-line on earnings per share (EPS). The stock declined 0.9% when the earnings came out.
AC stock is rapidly becoming one of the cheapest in the Canadian markets. Trading at a mere 2.6 times trailing earnings, it’s entering deep value territory. Although the company faces certain risks, such as a high amount of debt and basically no shareholder’s equity, the material damage that caused these risks to arise is well into the past. Most likely, Air Canada will continue paying off its debt and eventually accumulate positive book value, and cease looking as “risky” as it looks today.
Air Canada’s most recent earnings
Air Canada’s path to recovery can be seen in its Wednesday earnings release. Although the results were not as good as those seen in the same period last year, they were good enough to make the current stock price too cheap.
In its most recent quarter, Air Canada delivered:
- $5.5 billion in revenues, up 2% year over year.
- $466 million in operating income, down 41%.
- $914 million in adjusted EBITDA (earnings before interest and depreciation), down 25%.
- $411 million in net income, down about 50%.
- $1.04 in earnings per share (EPS), down about 50%.
The metrics declined, but they were not so bad as to justify the airline’s current, very low stock price.
So far in 2024, Air Canada has repaid $2.1 billion worth of debt. Second quarter debt decreased $1.7 billion compared to the second quarter last year. This reduction points to a future that will be much better than the recent past. First, the company will have lesser interest expenses. Second, it will have positive book value, which will increase the further the debt reduction goes. So, if AC does not rise from today’s level, it will look progressively cheaper with time.
Approaching 2020 COVID lows
Despite being profitable and even growing its revenue, Air Canada currently trades close to its 2020 COVID lows. The lows for that year were close to $12.50, AC stock is at $15 today, so Air Canada is currently up just 20.8% from its price during a period in which it was on the verge of going bankrupt. This valuation difference is not likely to last forever.
Earnings still positive, revenue still growing
While a cynic would say that Air Canada’s declining Q2 earnings were cause for concern, it’s just as easy to take the opposite view, that any profit at all justifies the company trading higher than it did when it was losing $4 billion a year. True, Air Canada added some low interest debt since those dark days, but the debt is being paid off quickly.
A dirt-cheap valuation
Most financial data platforms report that Air Canada trades at 2.6 times trailing earnings. The concern, apparently, is that earnings will continue going down, because a stock at 2.6 times earnings is a steal: it means the company can pay back your investment in less than three years! Sure, AC’s most recent earnings release showed a 50% decline in earnings. However, EPS for the just-reported quarter was $1.04. If you annualize that you get $4.16 in annual earnings. Let’s imagine that Air Canada’s next three quarters are weak like Q2 was. In that case, the forward P/E ratio is 3.6, which isn’t as good as the trailing P/E ratio, but still indicates dirt-cheapness.
So it looks to me like Air Canada won’t hold these extreme lows for long. The company is making more money than its share price indicates.
