The airline stocks, as a whole, have recovered significantly since the pandemic lockdown days. Pardon the pun, but your mileage is going to vary based on which air travel stock you opted to buy amid the 2020 stock market meltdown. And while some airline plays have been faster to bounce back than others, I do think that it’s a mistake to count the ones that have yet to leave the tarmac out of the game, just because of a little delay and a bit of turbulence. Indeed, shares of Air Canada (TSX: AC) have not been one of the fast flyers in the past five years.
The stock is up just over 27% in the last five years while the rest of the market has picked up serious speed. Most notably, the TSX Index has gained a whopping 68% in the same timespan. And while AC shareholders may feel the calling to become a passive investor and only put new money into the indices moving forward, I think it’s a bad idea to depart the stock (again, sorry for the airline puns!) before it’s ready for its next big lift-off.
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Air Canada is starting to gain speed
In the past three months, things have been looking higher for AIr Canada, with over 54% returned in the last three months. That’s some remarkable performance powered by a pretty decent last quarter. As the company flies into its latest quarterly earnings report in late July, many investors may be wondering if the battered airline stock, currently going for just over $21 per share, is worth boarding on recent newfound strength. I think it is. Why?
The company’s cost management program has already saved the airline a great deal of cash. Even if Canada were to experience sluggishness in the second half, it’s really nothing that the Canadian airline titan can’t handle. The company has arguably done decently in the face of recent industry headwinds, posting positive free cash flow while experiencing a slight downtick in the leverage ratio.
And with peak travel season upon us, perhaps Air Canada will have permission to fly even higher without returning to the teens. Indeed, AC stock has had trouble sustaining any sort of momentum over the years. It seems like every bounce is followed by a painful plunge that brings the stock right back to where it was prior to the win streak. It’s frustrating for investors, to say the least. But the firm may see real value in buying back shares at these depths.
In any case, I continue to see real value at more than 11 times forward (or 4.8 times trailing) price-to-earnings (P/E). It won’t be a steady ascent, and there’s going to be turbulence in the second half. But despite the pressures, Air Canada has a proven management team that’s busy improving operating economics amid hard times.
Bottom line on AC stock
When the good times come around, such long-lasting improvements, I think, could power a relief rally for the ages. Now, I’m not saying to expect prior highs to be touched anytime in the next five years (that’d entail a more than doubling in shares), but I do think investors should fasten their seatbelts as management pilots investors through even more turbulence. It’s not turbulence that Air Canada can’t handle, though!
