Air Canada (TSX: AC) may already be a household name, but in my very humble opinion, it’s one of the best deep-value stocks that is hiding in plain sight on the Canadian stock market. Indeed, the airlines can be really tough to invest in.
Historically, they’ve offered quite the turbulent ride (apologies for the pun) for investors, thanks in part to high overhead costs and their sensitivity to the state of the economy. While the operating economics are quite choppy, I think that the rear-view mirror isn’t a sign of what’s to come for an industry that I believe stands to evolve significantly over the next five to seven years.
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It’s time to give airlines a second look
Indeed, perhaps the biggest tell that it’s time to embrace the airlines is the fact that Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B) has returned to the industry. While it’s unclear who made the airline investment (and it’s a relatively small bet), especially since the Oracle of Omaha is now retired, I think that the move points to favourable industry changes to come.
With new aircraft clocking in seriously impressive fuel-efficiency gains, questions linger as to just how much industry economics stands to improve. Of course, it’s unlikely, at least in my view, for the likes of Air Canada to just pocket the fuel savings, especially since jet fuel spikes can happen (as they have recently with the soaring of oil prices in response to the geopolitical chaos in the Middle East). In any case, the long-term structural shift, I think, isn’t quite priced into a name like Air Canada.
A mid-cap gem with longer-term tailwinds beyond those nearer-term inflationary headwinds
The airline boasts a mere $7.7 billion market cap (it’s a mid-cap), and while it’ll take some time to return to those pre-pandemic heights, I think that the better-managed firm is on the right track already. Even with the latest dip in the shares, they’re still up close to 47% in the past 52 weeks.
With the spike in oil, that’s some serious resilience, which, I think, extends well beyond this hot travel season. In the meantime, jet fuel headwinds could weigh heavily, but I’d view the pressure as more of a buying opportunity than a sign that it’s time to book profits and run for the hills, especially as the best of the summer travel season comes to an end.
As Air Canada chips away at the debt on its balance sheet while looking to benefit from future aircraft that stand to be even more aerodynamic and, with that, fuel-efficient, we could be moving into an era where flight costs contract considerably due to advancements in the next generation of aircraft. For Air Canada, that means potential sales growth coincides with decent margin expansion.
The bottom line
Add AI operations-smoothing initiatives into the equation, and it’s more apparent that shares of AC have a pretty promising stage set for the next decade and beyond. Of course, in the meantime, trade war turbulence and soaring fuel costs remain a pressure point, which is more transitory in nature than anything else. While I wouldn’t load up on a 10% dip, AC shares are an enticing name to stash on a radar as the fall and winter season approaches.
