Early today, the Canadian Union of Public Employees (CUPE) announced that it had reached a last minute deal with Air Canada (TSX:AC) to resolve outstanding issues pertaining to flight attendants’ new collective agreement. As a result, the flight attendants strike – which had begun just two days prior – was abruptly called off.
Air Canada investors breathed a sigh of relief after the strike news came out. As of 12 pm on Tuesday (the time of this writing), the stock was up 1.2% for the day, despite North American equity markets being broadly in the red. At mid-day, the S&P 500 was down 0.31%, the NASDAQ-100 was down 1.3%, and the TSX was flat. So, Air Canada’s 1.2% gain was particularly impressive on a relative basis.
The question is, are investors right to be bidding up Air Canada stock now – and if so, is the stock a buy? While it’s tempting to buy stocks that are going up, the fact is that the higher a stock rises, the more likely it is that all of the good news is ‘priced in’ to it. So, we need to take a very careful look at Air Canada stock to determine whether it is still a buy today.
Details of the agreement
One document we’d like to have when analyzing Air Canada stock post-CUPE agreement is the agreement itself. That would tell us exactly how much AC’s staffing costs will increase as a result of the mediated settlement. Unfortunately, neither Air Canada nor CUPE has publicly commented on the details yet. What we know is that the flight attendants asked for a 38% pay hike over a period of a few years, plus full pay for work not done on an airplane. Air Canada met the union’s demand on base pay, but was unwilling to pay the full hourly rate for time not in the sky, offering 50% pay for that time. The fact that CUPE agreed to settle indicates that Air Canada may have upped its offer on non-airplane hours somewhat. That will definitely lead to an increase in operating costs in the year ahead.
Air Canada’s financial situation
Air Canada was in a pretty good place financially heading into the recent strike. In the most recent reported quarter, it had about $183 million in free cash flow (FCF), despite having guided for breakeven levels of FCF in a prior quarterly earnings presentation. The airline also delivered positive revenue growth in the period. Air Canada does have a considerable amount of debt, but much of it is low interest debt acquired from the federal government during the COVID-19 pandemic. Overall, AC looks to be in a good place financially right now.
Valuation
Probably the most enticing thing about Air Canada stock is the multiples it trades at. At today’s price, AC trades at just 4.7 times reported earnings, 0.3 times sales, three times book value, and 1.5 times operating cash flow. These are some truly dirt cheap multiples, for a company that is growing!
Foolish takeaway
Taking into account everything explored in this article, Air Canada stock looks like an enticing buy. Its biggest headwind just passed, it is highly profitable, and it is dirt cheap. While we’d like to have the details of the new flight attendant collective agreement, it’s unlikely that AC management was forced to offer so much the airline will start losing money. So, AC stock could take to the skies.
