Any stock with a trailing price-to-earnings ratio under eight times and a forward price-earnings ratio under five times is one I’d certainly put in the value bucket. As it stands today, Air Canada (TSX: AC) fits this profile, with these metrics signalling the market believes there’s significant stress ahead.
To a certain extent, I think this view is warranted. But that said, let’s dive into the bear case driving this market sentiment around Air Canada, and the bull case as to why deep-value investors may not want to ignore this name right now.
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Why the long face?
Investors have clearly continued to view the airline sector as one that’s hard to invest in. I’d say that’s a fair sentiment, considering the fact that many airlines struggle to remain profitable in the best of times, with Air Canada and others often requiring bailouts when the stuff really hits the fan.
That said, during past bull markets, Air Canada’s stock price has rocketed higher. And while that growth did previously come with a still-low valuation multiple, the company’s current valuation suggests that investors believe there’s a recession incoming.
I’m not going to go that far, just yet. A recession is certainly a possibility, and investors are clearly changing their probability calculus when it comes to this name. But if we don’t see a very broad and sharp deterioration in air travel from Canadians, this is a stock that could be due for some meaningful upside over the near term.
The bull case for Air Canada
I think any sort of investing time horizon for an airline like Air Canada needs to be capped within a certain window. This view comes partly due to the fact that the airlines sector is one that’s very cyclical. Unlike other sectors that can ride very long-term secular growth catalysts to new all-time highs on a frequent basis, essentially everything has to go right in order for airlines to see such a move.
Right now, I’d agree that there’s enough concern building under the surface to justify investing for a six-month or one-year period, and reassessing. But at this valuation, I think a six-month to one-year hold makes sense.
It’s just too cheap.
