The $12.5-Billion Reason I’d Avoid Air Canada Stock

Air Canada (TSX:AC) might look to have a low share price, but is it actually cheap? Or is there reason for that substantial drop?

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Before diving into a stock like Air Canada (TSX:AC), investors should take a few key factors into consideration. Even though a stock might have a low share price, it doesn’t mean that it’s cheap.

First and foremost, it’s essential to evaluate the airline’s financial health. Look at its revenue trends, profitability, and debt levels to gauge how well it’s weathering the ups and downs of the aviation industry. Air Canada, like many airlines, can be quite cyclical, so understanding its recent financial performance and future outlook can help you make a more informed decision.

So today we’re going to do just that. Let’s look at everything. From the broader environment, to fuel prices, let’s look at how Air Canada stock stacks up.

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Looking back

The past five years have been quite a rollercoaster for Air Canada on the TSX. After a challenging period during the pandemic, when travel restrictions hit the airline industry hard, Air Canada has been on a journey of recovery. The stock took a significant dip in early 2020, reflecting the widespread impact of COVID-19 on air travel. However, as restrictions eased and travel demand rebounded, Air Canada began to climb back up, showing resilience and adaptation to the new normal. Though nothing like the $50 share price from before the crash.

More recently, Air Canada has been working on strengthening its financial position and expanding its routes. The stock has seen gradual improvements as the travel industry continues to recover. Though it remains sensitive to fluctuations in travel trends and economic conditions. Investors have witnessed ups and downs, but the overall trend shows a positive recovery trajectory – at least, in terms of earnings if not share price. Keeping an eye on how Air Canada navigates the evolving travel landscape will be key for those considering an investment in this dynamic sector.

Looking at those earnings

Recently, Air Canada reported its second quarter 2024 results, showing a slight increase in operating revenues to $5.5 billion, up 2% year-over-year. Despite this revenue growth, the airline saw a significant drop in operating income, down $336 million to $466 million. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) also fell by $306 million to $914 million. On a positive note, Air Canada’s leverage ratio improved to 1.0 from 1.1 at the end of 2023, reflecting a bit of financial strengthening.

The airline’s performance was bolstered by increased capacity and improved on-time performance, with load factors staying strong. Air Canada stock continues to expand its network with new routes and additional aircraft. This signals a focus on growth and customer satisfaction. However, rising operating expenses and a notable decline in net income highlight ongoing challenges in balancing growth with cost management. Overall, while Air Canada is making strides in expanding and maintaining operational efficiency, investors should consider the mixed financial signals and the airline’s strategic moves for future growth.

What to watch

When considering Air Canada stock, one key thing investors should keep an eye on is its valuation metrics. With a trailing price/earnings (P/E) ratio of just 3.5 and a forward P/E of 6.2, Air Canada appears attractively priced compared to the broader market. However, these low multiples might reflect concerns about future earnings stability. And given the company’s high beta of 2.4, there is significant volatility. The stock’s 52-week performance has been quite rocky, down over 31%, which could also signal potential risks or underlying issues that investors should carefully assess.

Another crucial factor to watch is Air Canada’s debt levels. The airline has a substantial total debt of $12.5 billion. This is quite high compared to its total cash of $8.1 billion. The debt load contributes to a very high debt-to-equity ratio of over 1000%, suggesting potential financial strain or increased risk in the event of economic downturns or operational challenges. Keeping an eye on how the company manages its debt and ability to maintain profitability amid these pressures will be essential for investors looking at Air Canada’s stock.

All in all, it comes down to debt – the one thing that Canadians interested in Air Canada stock should watch. Until that gets under control, there simply isn’t enough reason to invest in this once-great stock.

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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 Amy Legate-Wolfe 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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