Air Canada (TSX:AC) has been going through a lot recently, including calling in the government over labour negotiations. Yet, in earnings, it lowered its full-year earnings forecast due to market pressures. The company now expects adjusted earnings between $3.1 and $3.4 billion, down from the initial guidance of $3.7 to $4.2 billion. Competitive challenges, a weaker Canadian dollar, and rising fuel costs have contributed to the more cautious outlook, leaving investors concerned about the stock's performance for the rest of the year. So, what now?

What happened?

In the past year, Air Canada's stock has faced a steep decline, dropping by 29.05% at writing. The stock has traded within a range of $14.47 to $21.42 over the last 52 weeks, reflecting the company's struggle to regain its pre-pandemic momentum. Factors like high fuel prices and inflation have weighed heavily on the airline's operations, making the recovery slower than anticipated. Although the return of travel has boosted revenue, ongoing challenges continue to impact profitability and investor sentiment.

Part of the reason Air Canada stock has faced headwinds is its high volatility. A beta of 2.39 indicates it is highly sensitive to market swings. Additionally, supply chain disruptions, labour negotiations, and fluctuating travel demand have added uncertainty. As a result, the stock has seen sharp movements throughout 2023, leaving investors questioning whether Air Canada can stabilize in the near term. Still, with steady passenger demand, there's hope that the company could rebound if it manages these risks effectively.

The last few years

Since its crash in March 2020, Air Canada has struggled to regain its footing. The pandemic brought air travel to a halt, causing the airline's stock to plummet. Though travel demand has returned, the company has faced new challenges, including rising debt and stiff competition. Its total debt load of $12.48 billion has burdened the company. Although revenues are climbing, Air Canada is still working in a challenging environment marked by fluctuating fuel prices and labour disputes.

Moreover, Air Canada's slow recovery in business travel, a historically lucrative segment, has impacted its ability to fully rebound. While leisure travel has surged, the business sector hasn't bounced back as quickly. This, combined with increased competition in international markets, has placed additional strain on Air Canada's recovery. The company's profitability margins remain under pressure, but it has shown resilience through operational improvements.

Is it valuable?

At its current price levels, Air Canada could be an intriguing buy for risk-tolerant investors. With a trailing price-to-earnings (P/E) ratio of just 3.36 and a forward P/E of 5.34, the stock is trading at relatively cheap valuations. The company's revenue momentum, bolstered by $22.26 billion in sales, suggests it still has room for growth. Analysts point to Air Canada's ability to generate strong earnings before interest, taxes, depreciation, and amortization (EBITDA) of $3.11 billion as a sign that the airline has the fundamentals to recover, even though profitability remains a concern.

While Air Canada's valuation looks attractive, the significant debt burden and ongoing competitive pressures make it a high-risk investment. The airline's return on equity of 603.77% is driven by its high leverage. And with a total debt-to-equity ratio of over 1,000%, there's a lot of risk baked into the stock. One analyst commented, "While Air Canada offers significant upside, it's not without risk, especially considering the competitive pressures and cost challenges ahead." Investors must weigh these factors when deciding whether to buy at these levels.

Bottom line

In a nutshell, Air Canada stock is in a tricky spot right now, with stock down 29% over the past year and facing challenges like high debt and competition. However, with record revenues and low stock valuations, there's potential for a rebound if the company can manage costs and stabilize demand. For risk-tolerant investors, it could be worth a closer look, but those seeking safer options might want to wait for more stability before diving in!