Air Canada (TSX) has been one of the most disappointing performers among the TSX Composite components over the past five years. Despite a 13% increase in the TSX Composite during this period, Air Canada’s stock has plummeted by nearly 65%. Even with a notable financial recovery post-pandemic, the Canadian flag carrier has struggled to regain investor confidence, making its share prices appear significantly undervalued relative to its financial performance and long-term growth prospects. This article will explore the reasons behind Air Canada’s recent underperformance and assess the factors that could drive its future stock performance.
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Reasons for Air Canada Stock’s Recent Underperformance
The COVID-19 pandemic dealt a severe blow to the airline industry, and Air Canada was no exception. In 2020, international border closures and travel restrictions led to a dramatic decline in global travel. Air Canada’s total revenue fell by 70% year over year (YoY), from $19.1 billion in 2019 to $5.8 billion in 2020. This decline in revenue, coupled with other pandemic-related costs, resulted in an adjusted net loss of $4.2 billion in 2020, a stark contrast to the net profit of $917 million the previous year. Consequently, Air Canada’s stock price plummeted by 53% in 2020.
To counteract these challenges, Air Canada took several measures including cost-cutting, bolstering cargo operations, and seeking government aid. Despite these efforts, the stock struggled to recover. As of now, Air Canada’s share price stands at $15.47, reflecting a 68% drop from its pre-pandemic closing price of $40.51 per share.
Could Air Canada Stock Stage a Sharp Recovery Soon?
The pressing question now is whether Air Canada’s stock is poised for a turnaround and can begin to close the gap with the TSX Composite.
Financial Growth Trends and Market Perception
One of the key factors influencing Air Canada’s stock recovery is its financial performance. Over the last 12 months, the airline has seen a 9.6% YoY increase in revenue, reaching $22.3 billion, thanks to a steady recovery in air travel demand and passenger volumes. Additionally, Air Canada’s adjusted net profit for the past four quarters has more than doubled YoY, totaling $1.5 billion. These figures not only reflect a significant improvement over the pandemic year but also suggest strong underlying growth trends.
However, the market seems to be overlooking these positive financial indicators. Despite improved revenue and profitability, Air Canada’s stock has not yet reflected this recovery, indicating that investor sentiment may still be cautious or skeptical.
Potential Catalysts for Future Growth
Several factors could contribute to a potential rebound in Air Canada’s stock:
- Economic Recovery: Recent rate cuts in Canada could lead to a gradual improvement in economic conditions, benefiting the travel industry and Air Canada’s financial performance.
- Strong Travel Demand: The ongoing recovery in global travel demand should continue to bolster Air Canada’s revenue and profit margins.
- Undervalued Stock: Given Air Canada’s recent financial performance and long-term growth outlook, the stock appears undervalued, suggesting that it might not continue to underperform the TSX Composite for much longer.
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In conclusion, while Air Canada’s stock has faced significant challenges and underperformed in recent years, the airline’s improving financial metrics and favorable economic conditions could set the stage for a potential recovery. Investors should keep an eye on these developments to assess when the stock might begin to close the performance gap with the broader market.
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