The airline sector has endured an especially tough interval for the reason that begin of the COVID-19 pandemic. Previous to the pandemic, Air Canada (TSX:AC) and its friends loved a multi-year bull run wherein airline shares simply outpaced broader indices.

As an example, Air Canada inventory surged 3,580% between January 2010 and January 2020. On this interval, the TSX gained simply 94%. Nonetheless, proper now, AC inventory is down 62% from all-time highs, permitting you to purchase the dip.

So, let’s see if Air Canada inventory needs to be on prime of your buying checklist for March.

Is Air Canada an excellent inventory to purchase?

The airline sector is cyclical and capital-intensive. Based on Warren Buffett, airline corporations don’t present any sturdy aggressive benefit. So, whereas they might enhance gross sales in periods of financial enlargement, it’s tough to translate the expansion into sustainable earnings.

The airline sector is crowded, and corporations have to maintain reinvesting money flows to extend passenger capability, in addition to add new visitors routes.

Within the final three years, Air Canada raised billions of {dollars} in debt to help its excessive money burn charges amid COVID-19. Regardless of pent-up journey demand and the reopening of economies, the airline is at present wrestling with greater rates of interest and elevated oil costs.

Air Canada reported income of $16.6 billion in 2022, a rise of 160% yr over yr. Its internet losses additionally narrowed to $1.7 billion from $3.9 billion. Analysts now anticipate the corporate to report gross sales of $20.1 billion in 2023 and $22.1 billion in 2024. Its adjusted earnings can even enhance, to $2.66 per share in 2024 from a lack of $2.76 per share in 2022.

So, AC inventory is priced at lower than 0.3 occasions 2024 gross sales and seven.6 occasions ahead earnings, which could be very low cost. But it surely ended the final yr with complete debt of greater than $16 billion and $2.4 billion in working money flows. So, a good portion of the corporate’s revenue margins will go in the direction of curiosity funds within the close to time period. Its curiosity bills totaled $909 million in 2022, a rise of 21% yr over yr.

We will see that Air Canada’s compelling valuation makes it enticing to traders. However there are macro dangers which will impression its income and revenue margins within the subsequent 4 quarters.

What subsequent for AC inventory worth and traders?

Air Canada expects its adjusted EBITDA (earnings earlier than curiosity, taxes, depreciation, and amortization) to vary between $2.5 billion and $3 billion in 2023, a rise of 88% yr over yr, given midpoint forecasts. Administration is also optimistic about ending 2024 with an EBITDA of round $3.8 billion.

For Air Canada to maintain bettering its revenue margins, the corporate will largely rely upon the rebound of world journey to take care of its momentum regardless of the prospect of an financial slowdown.

Air Canada reported file gross sales of $19.1 billion in 2019. These numbers are anticipated to be breached this yr, permitting the airline large to enhance its steadiness sheet and stage a comeback on the TSX.

Analysts stay bullish on AC inventory and anticipate it to realize round 40% within the subsequent 12 months.