Air Canada (TSX:AC) has been one of the worst-performing TSX Composite components in the last five years, losing nearly 65% of its value against a 13% increase in the index during the same period. The Canadian flag carrier seems to have failed to regain investors’ confidence in the post-pandemic era despite showing a sharp financial recovery, which makes its share prices look highly undervalued based on its financial performance and long-term growth outlook.
This underperformance has left many investors questioning when or if Air Canada stock will start to close the gap. To address this question, I’ll first highlight the reasons behind Air Canada’s recent underperformance and then discuss some key factors that could drive its future stock performance.
Source: Getty Images
Reasons for Air Canada stock’s recent underperformance
As you might already guess, the biggest reason behind Air Canada stock’s underperformance has been the severe impact of the COVID-19 pandemic on the airline industry. As international border closures and shutdowns brought global travel to a halt in 2020, most airline companies, including the largest Canadian passenger airline company, faced huge declines in passenger volumes, which led to big financial losses.
Notably, Air Canada’s total revenue tanked by 70% year over year (YoY) from $19.1 billion in 2019 to $5.8 billion in 2020. This massive revenue decline and other global pandemic-related costs resulted in an adjusted net loss of $4.2 billion in 2020 compared to a net profit of $917 million in the previous year. As a result, its share prices tanked by 53% in 2020.
Although Air Canada promptly took several steps to reduce costs, increased focus on strengthening its cargo operations, and sought government aid to navigate the financial stress, these measures couldn’t help it regain investors’ confidence. That’s why its stock currently trades at $15.47 per share with a market cap of $5.5 billion, reflecting a 68% decline from its pre-pandemic year’s (2019) closing price of $40.51 per share.
Could Air Canada stock stage a sharp recovery soon?
Now, the big question is whether Air Canada’s stock can recover and outperform the TSX Composite in the coming years.
Air Canada’s financial growth trends could be a primary factor on which its share price recovery depends. But isn’t that something the market seems to be ignoring?
To give you an idea, over the last 12 months, the company revenue has risen 9.6% YoY to $22.3 billion with the help of a consistent recovery in air travel demand and passenger volumes. Similarly, its adjusted net profit in these four quarters has more than doubled on a YoY basis to $1.5 billion. It is important to highlight that Air Canada’s sales and profit figures from the last 12 months significantly exceed its pandemic year’s financial figures. Given these strong growth trends, you can’t blame Air Canada’s weak financials for the underperformance of its stock.
More importantly, the recent rate cuts in Canada, which could gradually boost economic conditions, could further support the travel industry’s growth and further improve Air Canada’s financial performance. These are some of the key reasons why I don’t expect Air Canada stock, which currently looks undervalued, to continue underperforming the TSX Composite for much longer.
