Air Canada Stock Forecast: Will it recover?

Air Canada (TSX: AC) was one of the best-performing stocks in the pre-pandemic era. It rose 2150% between June 2013 and December 2019 from about 2 CAD to crossing 50 CAD by end of 2019. By the first quarter of 2020, Air Canada was hoping to post its 28th consecutive quarter of operating revenue growth in the first quarter (Q1) of 2020. Instead, as the pandemic dictated the terms, the company reported a net loss of $1.049 billion net loss during the quarter to set the prelude for coming quarters.

After three years, the stock is almost at a 60% discount to its pre-pandemic highs but is showing signs of recovery. Should investors consider investing in this airline stock?

Air Canada Stock Forecast: Bull Case

  • A turnaround in Quarter Results- As countries begin to relax Covid restrictions, air travel picked up and airlines being the primary beneficiaries started generating more revenue. Air Canada had 12 consecutive quarter losses starting from the first quarter of 2020. But things are slowly turning around. For the first time since the pandemic, it reported net operating income in Q3 2022. In the last quarter ended September 30th, 2022, operating income reached $644 million. In the same quarter last year, the company reported an operating loss of $364 million.

In addition, Air Canada reported a net 12.1% operating margin during the quarter. It was possible due to improvement in metrics and operating revenue doubling to $5.3 billion YoY on capacity growth of 130%. The company’s EBITDA also rose YOY to $1 billion. Hence, there is a turnaround in quarter results as compared to previous quarters and this is a leading indicator for a turnaround in the stock price.

  • Air Traffic Continues to Grow- Air Canada’s revenue continues to grow in recent quarters on the back of growing air traffic. It reported a passenger revenue of $4.818 billion, almost three times that of Q3 2021 and 94% of pre-pandemic levels. For Q4, 2022 company is planning to increase the average seat miles (ASM) capacity by 60% compared to Q4 2021. Additionally, the revenue is forecasted to grow by 19% to $18.9 billion in 2023.

Air Canada Stock Forecast: Bear Case

  • Gloomy Global Picture-  While, other industries recovered from the Covid scare by end of 2021 and through 2022, the airline industry is yet to recover. The macroeconomic problems are yet taking a toll on Air Canada’s stock. The rising interest rates along with higher fuel prices are a double whammy for Air Canada. The company’s fuel expenses jumped by $1.2 billion or 243% YoY in Q3 2022. While it is on the verge of recovery, there is an economic environment of recession in the US and Canada that could again bring down air traffic in 2023.

Moreover, there are rising cases of Covid being reported in China and East Asia. There are rumors of travel restrictions imposed again for travelers in this region. These developments can hamper the growth prospects of Air Canada in 2023.

A Look at Profitability – Although the revenue is increasing in recent quarters, we need to analyze the profit margins also which are under pressure. Net earnings are reported as negative in each quarter since 2020.

image 701

*Source: Trading View

In the latest quarter, it was estimated to report an EPS of 0.52, instead, it came negative at -1.42. It is only expected to reach the pre-pandemic level in terms of profitability by Q3 2023. This time can elongate further if interest rates are kept high for 2023 and fuel prices do not go down. The worry of impending recession can be a party spoiler for Air Canada in 2023.

Air Canada Stock Forecast: Technical Analysis

image 702

The above image shows the daily chart for Air Canada since April 2021. It has been majorly in a downtrend since the beginning of the pandemic but tried to recover from the lows of $9 formed in March 2020. In recovery, it touched a high of $31 in March 2021 $31 but again resumed the downfall.

Going forward, the recent low of $15.61 formed in June 2022 will act as strong support. If by any means, that is broken, the next support lies at the pandemic low of $9. Whereas, as it is in a downtrend, multiple resistances are there going up. The first resistance is at $20 formed in October 2022. $20 was a major support in December 2021 and March 2022, but once it was broken in a downtrend in June 2022, it became a major resistance. Beyond $20, the next very strong resistance is at $25 as the stock has formed a double top on $25 in March and April 2022. Post $25, every dollar mark is a resistance, $30 being the strongest.

The support and resistances are shown in the table below for reference.


Air Canada Stock Forecast: Valuation Analysis

For the last three years, Air Canada has not been making a profit. Hence, it does not have a current P/E ratio. However, it has a forward price-to-earnings ratio. It currently trades at 16 times the forward price-to-earnings ratio. It is expected that Air Canada will return to profitability in 2023 and of profits to skyrocket in 2024 and 2025 and right now it trades at just 6.4 times expected 2024 earnings, which is a much more compelling valuation.

Additionally, in 2024, it is expected to earn $1.1 billion in free cash flow which is very important to start paying debt accumulated in times of Covid to stay afloat.

Conclusion: Is Air Canada a Compelling Buy?

There is no doubt that Air Canada was one of the best investments in the pre-pandemic era. The pandemic changed the equation and so does the rising interest rates in Canada and US. The company has reported operating income for the first time in 12 quarters and it seems that a turnaround is possible in the coming months.

But a lot of uncertainty stills looms around the globe with rising cases of Covid in East Asia and impending recession in Europe and the US. Air travel volume can slump again which can lead to dismal revenue and earnings performance by Air Canada.

While the stock is recovering and it can offer great upside over the coming years, 2023 can still be choppy for the stock.

Note: Crowdwisdom360 collates Predictions and data from all over the net and has no in-house view on the likely trends in the Stocks or Crypto Coins. Please consult a registered investment advisor to guide you on your financial decisions.

Writer: Vineet Agarwal