Air Canada Analysis 10/18/24

10月18日

DISCLOSURE: As of 10/18/24 I have no open positions in Air Canada TSX: AC

Air Canada is a Canadian airline who took a big hit during COVID and added a lot of debt to their business. Because of the unstable financial position the valuation is very low and could provide large returns in the event of a turnaround.

The Debt



Looking at the debt ratios the debt/equity looks very high, but the debt/asset ratio looks much better. Of course as all airlines do they use debt to buy their planes and other assets. However it is worth noting that the debt here is a problem. (Higher than competitors)

For a long term buy and hold I would like to see much more cash on the balance sheet, but this is a turnaround play after all. If Air Canada's margins decrease to unprofitable they may be forced to sell assets to cover liabilities.

Qualitative



Looking at the qualitative metrics it is obvious that Air Canada took large losses in 2020 but has since recovered in terms of earnings, revenue, and margins. The stock price however has not recovered, this is likely due to the debt load they are stuck with now.

From a long term perspective airlines are notoriously bad businesses struggling with debt, unprofitability, and an extremely competitive environment. This is why I only intend to hold this stock for a maximum of 3-5 years.

Valuations



The valuations are where things start to look up for this company. With a price/cash flow of 1.75 you would be getting your investment back in about 1 year 9 months. On the other hand if they lose money and are forced to sell assets the stock will likely remain flat or decline further.

The way I view Air Canada is as an asymmetric bet. For example, I assigned some arbitrary values to my model where I see a 25% chance that they sell off assets. a 50% chance that earnings and margins remain stable and a 25% chance that earnings and margins increase

In the worst case scenario the stock will likely fall another 25%-50% and in the best case scenario AC could be a 4x from current valuations. Of course the risk/reward I am assigning to these values is subjective and I highly suggest doing your own research to see how you feel about these outcomes.

For me at current prices Air Canada TSX: AC is a buy. So long as you keep in mind the potential risks and dont be shocked if the 25% chance of the downside materializes.

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