Why I’m Watching This Recovery Play #CanadaFinance

Written by Karen Thomas, MSc, CFA at The Motley Fool Canada

Air Canada (TSX:AC) was a spectacular success story before the pandemic, rising to heights that few of us thought possible. In fact, back in early 2020, Air Canada’s stock price rose above $50. This was an all-time high that was backed by strong demand, improving efficiencies, and strong all-around performance.

But this came crumbling down with the pandemic, and today, amidst a strong recovery in air travel, Air Canada is taking another blow.

Let’s explore.

Despite what was a clear rebound in air travel after the pandemic, investors were skeptical. We could see how vulnerable the airliner was and, despite a strong recovery in air traffic, revenue, and earnings, the stock hovered around $20 in recent years.

But let’s make no mistake – Air Canada is a recovery play. It has surely taken some hits, the most recent being a hit to U.S. travel due to tariffs and increased U.S. security at airports. In fact, Canadians’ trips to the U.S. have fallen 13.5% in March, after a similar drop in the prior month. However, this doesn’t take into account the strength of Air Canada’s increasingly global network.

So, the airliner is scaling back its U.S. flights in response to this demand shift. At the same time, it’s adding flights to other destinations. For example, Air Canada is adding non-stop flights between Montreal and Edinburgh, and additional flights between Canada and Athens. And, travel within Canada is increasing as travelers increasingly choose domestic locations over U.S. ones.

To be sure, there is an adjustment happening in response to recent events, and the threat of tariffs and a possible recession is concerning. While there will be a cost to these adjustments, the key thing to remember is that Air Canada can redirect its business to maintain its strength.

The turmoil that the airliner has and is facing is well-known. The next job to assess the stock is to take a look at its valuation. And on this front, it looks good. This is because the stock is trading at dirt-cheap valuations despite the company’s strong performance.

For example, operating revenue came in at $22 billion in 2024. This compares to operating revenue of $19 billion in 2019.  Also, adjusted net income came in at $1.4 billion in 2024 versus $917 million in 2019.

Yet, Air Canada stock is trading at a mere 6.5 times this year’s earnings and 5.4 times next year’s earnings. Importantly, earnings per share (EPS) is expected to fall this year versus last year, but to increase 22.5% in 2026.