Investors love a good contrarian play. This likely stems from the “greedy when others are fearful and fearful when others are greedy” Warren Buffett quote we so often hear.
However, in some instances investors looking to buy beaten down Canadian stocks are purchasing them thinking selloffs are just due to “fear,” when in fact they are more than justified.
Does Air Canada (TSE:AC) fit that mold? Lets take a look.
Is Air Canada (TSE:AC) a Canadian stock to buy, or avoid?
Air Canada was no doubt one of the most popular and highly traded Canadian stocks of 2020. After all this is a Canadian icon, an airline that was one of the most efficient in the world prior to the COVID-19 pandemic. And unfortunately things changed fast.
Market Cap: $7.58 billion
Forward P/E: 0.00
Stocktrades Growth Score: Premium Members Only
As you can see by the chart above, Air Canada has been through some trials and tribulations. The company went through bankruptcy protection in 2003, and the company came close to doing so again in late 2012.
Once the company got its affairs in order however, it became one of the best performing Canadian stocks on the index, going from $1 a share to over $50 prior to the COVID-19 market crash.
So the real question many investors are asking right now, is will Air Canada approach bankruptcy again in 2021 due to this pandemic, or is this a diamond in the rough in terms of value?
Air Canada is losing a significant amount of money, and accumulating debt
With Air Canada posting third quarter results in early November of 2020, we’re finally catching a glimpse of how bad this pandemic truly has been for Air Canada.
The company reported overall traffic is down by 88%, and overall the company has posted a loss per share of $12.58 through the first 9 months of fiscal 2020.
Yes, you read that right. A loss of $12.58 per share. This is a drastic decrease from the $4.93 the company earned through the first 9 months of 2019.
Looking on the debt side of things, the company has added over $3.05 billion in long term debt to the balance sheet, and now holds over $13.2 billion in total debt in, $2 billion of which comes due in the next year.
For a company that has seen overall revenue collapse, it’s having to issue shares like we saw in late December of 2020 to keep its head above water.
So, how long will this last, and how long until we see the company return to normal, if ever?
When will we see Air Canada recover, if ever?
You’d be hard pressed to find a company that’s been hit harder by the pandemic than Air Canada.
Investors have the attitude that this company will return to normalcy once COVID-19 has subsided and travel gets back to normal. However, we have to think of the financial situation the company has put itself in just to weather this storm. A storm that is far from over at that.
As I spoke with the debt numbers above, this company has diluted shareholders via share offerings, leveraged airplane parts and added over $3 billion in debt to the balance sheet. Once things return to normal, it would be safe to say that Air Canada is going to be paying off this debt and de-leveraging for the short and even mid-term.
I see many people with the attitude that this is simply going to be as easy as flipping a switch.
If someone loses their job and is paying their rent with a credit card, they’ve still got a debt to repay once they get back to work. The situation is very similar to Air Canada.
I’m not leaning as far as bankruptcy when it comes to the company’s financial situation. I think considering the circumstances, the government would likely help Air Canada out. However, those who think this company is returning to normal in late 2021 are likely to be disappointed.
Air Canada is going to require extensive patience
I’d like to speak one one thing before I move on. When I’m speaking on Air Canada’s recovery, I’m speaking at a company level. It’s becoming more apparent in 2021 that there is a growing disconnect between many stock prices and the underlying company’s that accompany them.
So, could I see Air Canada’s stock price rising in 2021 based on vaccine news and travelers getting back to what they do best, traveling? Absolutely.
However, the company’s stock price, if it does decide to go up, likely will not represent the true financial health of this company moving forward, and you’ll likely be paying too much. And, in most situations like this stock prices tend to come back down to earth.
Air Canada is a struggling company. One that is mired in debt, and will likely spend the next half decade paying it off. In fact, the company themselves stated early on in the pandemic that it will take 3+ years to return to 2019 revenue levels. There are other companies out there with potentially brighter horizons, such as Power Corp of Canada (TSX:POW).
These estimates were made assuming that travel would somewhat return in December of 2020. We all know how that’s worked out here in Canada.
If you’re looking to take a position in Air Canada today, you’d better have a 5+ year time-horizon, a whole lot of patience, and a high tolerance for volatility.