Air Canada (TSX: AC): the best TSX stock for September?

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TSX stocks are in trouble. Since the beginning of the year, the S & P / TSX Composite Index lost 2% of its value. What the index doesn’t show you, however, is that some stocks have lost a lot more. Air Canada (TSX: AC), for example, is almost 70% lower.Airline stocks are a mess right now. Demand remains at lower levels due to the coronavirus. Travel restrictions limit traffic, but even if lifted, it’s unclear how many business and leisure travelers would return.

With expectations so low, even a slight uptick in demand could push these stocks up.

Air Canada is currently operating at only 5% of its usual capacity! It would not take much to boost revenues.

Read these details

Let’s get rid of the obvious: Air Canada is not doing well right now. In the last quarter, he lost $ 1.7 billion. The previous quarter it lost $ 1.1 billion. That’s a loss of $ 2.8 billion in six months.

“As these figures show, most of our country’s commercial aviation has effectively been shut down,” notes CEO Calin Rovinescu.

The craziest thing is, the company’s total market capitalization is currently only $ 5.1 billion! By 2021, the losses could eat away at its entire valuation.

To be fair, Air Canada still has about $ 9 billion in cash. While that’s more than his market cap, he’s still less than 24 months of track.

How long do the leaders think the crisis will last?

“As we said earlier, we expect the recovery to take at least three years,” says the CEO of Air Canada. Manufacturers love Airbus and Boeing believe the recovery could take up to five years. Delta AirlinesCEO believes industry will stay permanently smaller.

I bet you see the lag here. Air Canada has less than 24 months of financial track, but the recovery will take at least three years. How do you square this circle?

Bet on Air Canada shares?

There are currently two bull cases for this stock.

The first is that the coronavirus pandemic will abate quickly and air traffic will normalize much faster than the market thinks.

If that happens in the next 12 months, the action is clearly a buy, but it’s a difficult thesis to defend. Even if a vaccine were discovered today, approval, manufacture and scale-up could take a year. Travelers would then still need to overcome their flying fears.

The second bullish case is a long term bet. If you are prepared to wait until the lean years are over, you can capitalize once the recovery takes place. This is a reasonable position, but it has a major flaw: dilution could dampen any upside potential.

Airlines like Air Canada will undoubtedly need to raise huge amounts of capital to survive. This means that the current shareholders will have to share the benefits, probably to a large extent.

“This capital, while it may save them, will reduce the value of their businesses. Share issues would permanently dilute shareholders, as future profits will be shared with a much larger shareholder base, ”concludes Vitaliy Katsenelson, CIO at Investment Management Associates.

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The Motley Fool recommends Delta Air Lines. Mad contributor Ryan Vanzo has no position in the stocks mentioned.

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