Down by 20%: Is Air Canada Stock a Buy After its Earnings?

Airport and plane

When the pandemic struck, the resulting shutdowns impacted every business across all sectors. While companies in many industries found other ways to continue generating revenue and post strong recoveries, some businesses were worse off.

Airline stocks are the biggest example of companies that felt the crunch from the pandemic more than others. With the world in a post-pandemic era, things will likely improve. However, a look at Canada’s largest airline stock might put things into better perspective.

Air Canada (TSX:AC) released its fourth-quarter and full-year earnings for fiscal 2022 in February. As of this writing, the top Canadian airline stock trades for a 20.52% discount from its share prices before the earnings release. Let’s look at what is happening with the flag-carrying Canadian airline to determine whether 2023 might finally be the time to buy its shares again.

Strong earnings growth

With international and domestic travel restrictions lifted, Air Canada is finally seeing strong earnings growth. Its latest quarter saw Air Canada report passenger revenue of over $4 billion, reflecting over twofold of its earnings in the same period last year.

Its fourth-quarter passenger revenue in fiscal 2022 also surpassed the figure it reported in the quarter right before the pandemic. Yet it ended the quarter on a bad note.

Despite an immense growth in its revenue, Air Canada stock reported a massive $28 million loss. For the full fiscal year 2022, Air Canada accumulated $187 million in losses. Granted, it is better than the $3.049 billion full-year loss in fiscal 2021. Still, Air Canada stock has a long way to go to achieve profitability again.

Does it have room to grow?

Air Canada undoubtedly has room to grow. The airline expects its gains to continue into 2023 and beyond, and it aims to surpass its 2019 available seat miles. Its recent quarter also saw Air Canada grow its ticket sales beyond its 2019 levels. That said, posting a strong recovery is not going to be easy for the beleaguered airline stock.

Despite drastically improving results, Air Canada’s recovery can easily be stifled by broader market volatility. Higher interest rates and persistent inflation can negatively impact its ability to continue posting strong earnings. Many argue that we are currently in a recessionary environment. If the economy faces significant issues in the coming weeks, it will undoubtedly enter a recession.

With living and borrowing costs becoming ever higher, the demand for air travel can drop significantly. Air Canada stock’s current financial improvements can be easily wiped out if that comes to pass.

Foolish takeaway

Stock market investing is inherently risky. However, some stocks entail more capital risk than others. When deciding where to allocate your money, it is essential to calculate the risks involved and consider your risk tolerance.

As of this writing, Air Canada stock trades for $18.40 per share. Considering the uncertainty in the broader economy, Air Canada stock might dip further. If you can handle potentially significant near-term losses, you can consider establishing a small position in the stock. If you do not have a well-diversified portfolio and do not have a high risk tolerance, it might be better to avoid investing in it right now.

The post Down by 20%: Is Air Canada Stock a Buy After its Earnings? appeared first on The Motley Fool Canada.

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Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.