Is Air Canada Stock on the Verge of Recovery?

When Air Canada (TSX:AC) stock plummeted from $50 a share at the start of the pandemic, most investors didn’t expect an instant recovery. However, there were several investors that would have expected Air Canada stock to recover by now, roughly two-and-a-half years since the pandemic began.

And while the pandemic is finally in the rearview, and Air Canada’s sales have been recovering, as I’ve warned for months now, it’s unlikely that Air Canada stock will rally for some time.

While the stock price is certainly much lower than the $50 a share Air Canada traded at before the pandemic, at this price, Air Canada has been fairly valued.

For one, the company took on a tonne of debt in the pandemic, and while its market cap fell significantly, its enterprise value (EV) has stayed relatively flat. In addition, although sales are recovering, its profit margins have been squeezed by rising interest rates and inflationary factors.

Not only that, but bottlenecks in the travel industry worldwide have caused more headaches for the airlines trying to recover.

It’s not all bad news for Air Canada stock, though. Over the past three quarters, for example, the stock’s revenue has been growing at more than 200% year over year. Furthermore, as of the second quarter, Air Canada stock’s revenue was at 88% of its pre-pandemic levels, on the verge of a full recovery.

So, what can we expect from Air Canada stock’s operations going forward? And when can we expect a recovery in the share price?

Air Canada’s recovery should continue throughout the rest of the year

After reporting first-quarter sales that were about 60% of its pre-pandemic pace and now second-quarter sales that reached 88% of its revenue before the pandemic, it’s clear that Air Canada is finally seeing a recovery.

And going forward, it looks as though analysts expect the stock to continue increasing its capacity.

For the third quarter, analysts expect sales to continue to recover and climb to about 94% of its pre-pandemic levels before surpassing its pre-pandemic sales by the fourth quarter. However, even more importantly, analysts expect a significant jump in Air Canada stock’s earnings before interest, taxes, depreciation and amortization (EBITDA) in the third and fourth quarters.

That would be significant, because although the increase in sales shows signs that the recovery has begun, for the stock price to move, Air Canada’s profitability is going to have to improve substantially.

With its EBITDA on the verge of recovery, and analysts expecting that Air Canada’s net income will turn positive in 2023, when can we expect to see Air Canada’s stock price start to recover? And how high can it rally to?

Is the airline stock worth a buy today?

To get an idea of when Air Canada stock could recover and by how much, we first have to get an idea of the stock’s value today.

Right now, Air Canada has a market cap that’s just shy of $6.5 billion — well off the $12.8 billion market cap it had at the end of 2019, right before the pandemic began.

More importantly, though, Air Canada’s EV is $14.3 billion — only slightly down from where it was at the end of 2019, when it was $16.3 billion. This is crucial to illustrate, because although the share price for Air Canada of $18 today is down over 60% from the start of the pandemic, its new EV is only 12% lower.

So, the stock still has a ways to go before it becomes undervalued. For example, in the three years leading up to the pandemic, Air Canada had an average forward EV-to-EBITDA ratio of 3.2 times. Today, its forward EV-to-EBITDA ratio is nearly double that at 6.1 times.

Therefore, it should be no surprise that the stock has yet to recover. In this environment, there’s simply too much uncertainty for investors to take the risk and buy today.

And until Air Canada can consistently earn a meaningful profit and use it to pay down some debt, it’s unlikely that the stock will begin to recover. Therefore, I wouldn’t expect a significant rally in the share price until at least 2023.

The post Is Air Canada Stock on the Verge of Recovery? appeared first on The Motley Fool Canada.

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Fool contributor Daniel Da Costa has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.