Stock Market Sell-Off: Is Air Canada a Buy?

Let’s find out whether Air Canada stock is worth buying after its improved financial performance in the third quarter.

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Canadian stocks showcased good strength in October as the TSX Composite Index recovered by 5.3% after a sell-off in previous months. Despite the recent sharp recovery, the index has still lost more than 11% of its value in the last seven months. Headwinds include several macroeconomic uncertainties due to high inflation and slowing global economic growth. Air Canada (TSX:AC) stock has underperformed the broader market during this seven-month period, losing over 19% of its value. Do these losses in AC stock make it look undervalued and worth buying for the long term? Before we discuss that, let’s take a closer look at some key highlights from Air Canada’s latest earnings report released last week.

Air Canada beat on Q3 earnings

In Q3, Air Canada reported a 153% YoY (year-over-year) increase in its total revenue to $5.3 billion – exceeding analysts’ estimates of $4.9 billion. Also, its September quarter sales showcased significant improvement over its Q2 revenue of $4 billion. The largest Canadian passenger airline attributed this improvement to strong demand and solid 150% capacity growth.

These positive factors, along with improved yields and the consistent positive contribution of its cargo segment, helped Air Canada post an operating margin of 12.1%. Interestingly, it was the first quarter since the start of the pandemic in which the company reported a positive operating margin. With this, its net loss for the September quarter narrowed to $508 million from $640 million a year ago but increased compared with its net loss of $386 million in the previous quarter.

But its challenges are not over yet

After losing 6.2% of its value in September, Air Canada stock jumped by 18.1% in October. The decline was mainly due to investors’ high expectations from its Q3 results. The Canadian flag carrier managed to post a positive operating margin in the last quarter. Yet, its troubles seem far from over as it faces a gloomy economic outlook.

Consider that, Air Canada’s aircraft fuel expenses jumped by $1.2 billion, or 243%, YoY in Q3 2022. And with ongoing geopolitical conflicts and strong demand, it’s highly unlikely that aircraft fuel prices will see a big dip in the near term. That’s why I expect high fuel expenses to continue to take a toll on the airline company’s bottom line in the coming quarters as well. In addition, a worsening economic outlook could hurt the demand for air travel – especially if the fears about a near-term recession turn out to be true.

Is AC stock worth buying right now?

Given all these challenges, I wouldn’t be surprised if AC stock’s rollercoaster ride continues in the coming months. Be mindful, its share prices could fall again after staging a recovery in October. Nonetheless, we must remember that no one can accurately predict a recession and to what extent it will affect air travel demand. That’s why long-term investors might not want to worry about short-term, temporary macroeconomic uncertainties. Instead, remain focused on adding fundamentally strong stocks to your portfolio at a bargain. Then, hold on for decades. Despite its October rally, Air Canada’s share price is still nearly 60% down from the pre-pandemic 2019 closing price.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

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