Shares of Air Canada (TSX:AC) seem to have come in for another landing after hitting a 52-week high just north of $23 per share just a few months ago. Undoubtedly, the airlines, as a whole, have been collectively flying higher of late, but with AC shares severely dragging relative to some of their U.S. rivals, questions linger as to whether Canada’s top airline can also find its feet. And if so, when will the stock be en route to pre-pandemic levels?
Indeed, if Air Canada can return to such heights, that’d imply a more than doubling of shares. But with the odd headwind and setback getting in the way for the stock as it looks for a clear runway to fly off the tarmac, it’s not hard to imagine that many Canadian value investors are just about ready to depart the name by throwing in the towel on shares. Undoubtedly, three years is a long enough holding period to see some results, right?
And while shares haven’t been too quick to get anywhere, at least not sustainability, given the massive bumps in the road (check out that heightened 2.5 beta), I think staying aboard and keeping your seatbelt fastened is the best way to go as Air Canada looks to catch a break for a change.
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It’s headwind after headwind for Air Canada
Indeed, the latest wave of strikes did not do the Canadian airline any favours. Also, those who had their flights disrupted may think twice before booking a flight with Air Canada again. In any case, with a limited number of international options, Air Canada is still one of the few flyers in a not-so-competitive market environment. With President Donald Trump’s tariffs causing some Canadians to rethink (and even cancel) their U.S. vacations this summer, Air Canada has really had to slog through a season of muted U.S. travel.
Nobody knows when the trade war between the U.S. and Canada will end peacefully. But I do think that demand for U.S. travel will, in due time, pick up again. And with that, so, too, could shares of Air Canada. Between strikes, tariff shifts in consumer behaviour, and slowing GDP growth in Canada (the latest 1.6% decline in GDP is ringing recession alarm bells in the ears of some pundits), it seems like AC stock is too risky and volatile to hold as a part of any TFSA growth or value portfolio. Add recent changes (think Aeroplan rewards changes) that have not won fans with frequent flyers into the equation, and it seems like there’s no flying out of the latest haze of storminess.
That said, I do think the turbulence is worth bearing, especially at a time of heightened pessimism. The headlines surrounding Air Canada have not been great. And with Canada potentially looking at a recession (you would not know it by looking at the trajectory of the TSX Index!), it’s the more cyclical firms in the market that could take the biggest hits. Fortunately, I view AC stock as so deeply undervalued with so many headwinds already priced in that even a modest quarter could be enough to spark a better-than-feared quarterly rally.
The stock is too cheap! And most headwinds will subside with time
At the end of the day, Air Canada has a tough hand to play. But it’s playing it the best it can. And with a 9.5 times forward price-to-earnings (P/E) multiple, the stock is too cheap to pass up, given the odds that headwinds weighing it down will subside in three years’ time.
