Investing in blue-chip stocks that are trading below their intrinsic values in any market can yield huge returns. And while I have been skeptical about this, Air Canada (TSX:AC) in the past due to the company's declining fundamentals, there is certainly a case to be made that it is now a beaten-down value stock that long-term investors may want to consider, given its current multiple of just 3.5 times earnings.
As Canada’s largest airline service provider, Air Canada is the top TSX-listed airline stock to watch. Let’s analyze whether this valuation multiple makes sense or whether the company could have further chances to fall from here.
Air Canada Financial Outlook
In the first quarter of 2024, Air Canada reported $4.9 billion in operating income, up $90 million from the same quarter last year. As a result, the airline's total revenue amounted to $5.5 billion, with operating expenses of around $5 billion. That leaves a fairly sizable operating margin and an impressive $1.14 earnings per share, especially considering the stagnation the company experienced following the pandemic.
Now, some investors might want to see the airline produce better results, given the surge in travel demand we've seen in the wake of the pandemic, as well as Air Canada's massive debt load. However, positive results are a good thing, and as long as the company can improve its balance sheet, it's clear that investors are working with a company that is producing solid free cash flow (over $2.3 billion last quarter).
In other words, with a market cap of around $5.5 billion at the time of writing, Air Canada stock is trading at a free cash flow yield of around 50%. That is certainly something that is hard to find in this market.
What makes this much-impaired stock worth considering?
Air Canada was recognized on the list of the 20 largest airlines in the world in 2019 and remains a key player in the Canadian airline market. With a dominant position in both the international and domestic passenger market, this airline has certainly benefited from the tailwinds of the last quarter (pun intended).
Now, the question will be whether this momentum can be sustained. After all, the Canadian consumer is one of the most needy in the developed world. And with recession signs turning red right now, it's clear that many investors don't want to be in this market if that hard landing some pundits have been talking about for some time happens.
The problem is that Air Canada's current multiple seems to more than reflect a very pessimistic outlook for the next five years. If things turn out better than expected, Air Canada stock could be a real winner. For those looking for value right now, this is one of the best stocks to consider, in my opinion.