Air Canada is a Buy?! Greg Newman explains

It’s a strange situation where the pandemic has now been tamed at least enough for economies to reopen and people to start travelling again. But here we have the share price for Air Canada (Air Canada Stock Quote, Charts, News, Analysts, Financials TSX:AC) not even maintaining altitude but actually slipping under the clouds in recent months. 

What’s an investor to do with a stock like AC? Buy it, says Greg Newman of Scotia Wealth Management, but just don’t hold it forever.

“It’s a very whippy stock and they really do have a balance sheet problem right now,” says Newman, senior wealth advisor at Scotia who spoke on BNN Bloomberg on Wednesday.

“6.4x 2021 net debt-to-EBITDA is not where you want to be, and of course the variant is not helping them,” Newman said.

Air Canada saw a resurgence in air travel across the country this summer, with the company saying in a recent internal memo that it needed extra staff at Toronto’s Pearson Airport as “airport partners are stretched beyond their capacity, which led to significant flight cancellations and missed connections,” according to a report by the CBC.

And while international travel is still dealing with a major slump as countries continue to tweak their vaccination and border policies, the fact that the market hasn’t been favourable to Air Canada is telling.

Like every other airline, AC’s stock took a nosedive around the start of the pandemic and has spent much of the intervening time trying to claw back some of those losses. A November to March rally saw the stock effectively double from a low of $15 to $30 but Air Canada has slipped since, dropping to now around the $23 mark. That’s still less than half of where the stock stood pre-pandemic at just above $50 per share.

But Air Canada’s downturn in recent months may have less to do with the company than with investor opinion of the sector as a whole, seeing as comparables like Delta, American Airlines and United Airlines are virtual carbon copies of AC’s recent chart. 

That doesn’t mean you shouldn’t be interested in the stock, Newman says, just that investors need to pay attention and consider AC a trade rather than a hold.

“The time to buy a stock like this, an airline stock, is when no one’s really paying attention to it. A few months ago when it was $29, everybody was asking do I buy it? No. Now when it’s $23 everybody’s saying, should I sell it? No,” Newman said.

“If you believe that the world is going to return to normal, then on 2023 numbers they’re trading at 9.9x. And their balance sheet looks a whole lot better in 2023,” he said. “This is a whippy stock, so do you hold this for a long time? No, this is more of a cyclical trade. You buy it when it’s out of favour and you sell it when people are tripping over it.”

“So, I do think you can buy it now,” Newman said.

Air Canada’s most recent quarterly numbers showed a big year-over-year jump in earnings, going from a loss of $1.75 billion for the second quarter 2020 to a loss of $1.17 billion for the Q2 2021. Still no small potatoes but an improvement nonetheless. And revenue was also up, going from $527 million a year ago to $837 million. Analysts were expecting revenue of $848.2 million.

“The COVID-19 pandemic continued to weigh on Air Canada and the Canadian airline industry in the second quarter, with its impact on travel reflected in our results. Our employees, as they always have, focused on taking care of our customers while carrying them safely to their destinations, and continued to ensure the prudent management of our company. I thank them for their ongoing care, creativity and hard work in this very challenging and complex environment,” said Michael Rousseau, President and CEO, in a July 23 press release.

Rousseau said the company saw a significant increase in bookings once travel restrictions were lifted in June.

“Our cash burn in the second quarter of about $8 million on average per day was better than earlier projections of $13-$15 million. We attribute this to increased bookings and our continuing effective cost controls,” Rousseau said. 

“We ended the quarter with close to $9.8 billion in unrestricted liquidity. We have seen in countries where reopening is further along than in Canada that the easing of travel restrictions not only facilitates travel but also drives additional demand for air travel and provides a potent stimulus to overall economic activity. Our current booking trend seems to be evidence of this,” he said.

Earlier this month, Air Canada announced the return of Rouge, the company’s low-cost airline, with flights starting up again between Toronto and Las Vegas, Orlando and Regina.