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Air Canada (TSX:AC) has faced significant challenges over the past five years, making it one of the worst-performing Canadian stocks, even when compared to other TSX industrial stocks. The stock has declined by 57%, even as the broader markets have risen. This underperformance has persisted despite a period of rising earnings for the company. Remarkably, Air Canada has managed to recover its earnings to levels higher than those seen in 2019, before the COVID-19 pandemic. Despite this financial recovery, the stock trades at a significantly lower price of $16.99, compared to $54 pre-pandemic
Market Sentiment and Buffett's Influence
The primary reason for the poor performance of airline stocks, including Air Canada (TSX:AC), is the negative sentiment toward the sector. A significant factor contributing to this sentiment is Warren Buffett's decision to sell airline stocks during the pandemic. Buffett, one of the most influential investors globally, has a substantial impact on market perceptions. His actions are closely watched and often emulated by other investors and institutional fund managers. When Buffett sold airline stocks in 2020, he cited the increased risks posed by the pandemic.
Buffett's decision initially appeared prudent, as airlines suffered significant financial losses during the pandemic. However, the sector has since rebounded, with airlines regaining their pre-COVID revenue and earnings levels. Despite this recovery, market sentiment remains pessimistic, likely influenced by Buffett's previous vote of no confidence.
Valuation and Investment Potential
Air Canada's current valuation suggests a significant disconnect between its financial performance and market perception. The stock is trading at a mere 2.9 times earnings and 1.4 times operating cash flow, making it one of the cheapest major companies in Canada. Despite this attractive valuation, investor interest remains low.
The company’s revenue and earnings are on an upward trajectory, presenting a long-term growth opportunity. The key question for investors is how long it will take for the market to recognize this potential and adjust its valuation accordingly.
Investing in Air Canada stock has been a volatile experience. The stock plummeted from $55 to $12 during the pandemic, recovered to $29 following the vaccine announcement, and then declined again. Holding this stock requires patience, but the long-term outlook appears more promising than recent history suggests.
The current risks facing Air Canada, such as rising oil prices and customer complaints, are relatively minor compared to the catastrophic impact of the COVID-19 pandemic. At approximately three times earnings, Air Canada stock offers a compelling investment opportunity for those willing to look beyond the current market sentiment and focus on the company’s fundamentals and potential for future growth.
