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• Thinking of investing in Air Canada but not sure if the current price reflects its true value? You are not alone. This is a hot topic among investors looking for opportunities.

• The stock has shown notable volatility, gaining 6.1% over the last week and 5.2% in the last 30 days. However, it is still down 14.7% year-to-date and 23.2% over the past year.

• Recent discussions around travel demand recovery and evolving industry regulations have added new layers to the Air Canada story. News of expanding international routes and a renewed focus on operational efficiency are fueling debates about the company’s future prospects.

• Air Canada currently scores 6 out of 6 on our valuation checks, which is a perfect mark. Let us dive into how that score was determined and why a more nuanced perspective on valuation might matter even more by the end of this article.

Find out why Air Canada’s -23.2% return over the last year is lagging behind its peers.

The Discounted Cash Flow (DCF) model estimates a company’s intrinsic value by projecting its future cash flows and discounting them back to today’s value. For Air Canada, this approach uses a 2 Stage Free Cash Flow to Equity method based on analysts’ forecasts for the next five years, with later years extrapolated to gauge long-term trends.

Air Canada’s latest twelve-month Free Cash Flow (FCF) stands at CA$1.71 billion. Analyst estimates indicate this figure could decline in the short run but increase over the next decade. By 2029, projections see annual FCF reaching approximately CA$1.90 billion, with longer-term estimates rising further as industry conditions stabilize and operational efficiencies take effect. All these numbers are presented in Canadian dollars (CA$).

Using these projections, the DCF model estimates Air Canada’s fair value at CA$85.08 per share. This represents a 77.6% premium over the current market price, suggesting the stock is significantly undervalued according to this approach.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Air Canada is undervalued by 77.6%. Track this in your watchlist or portfolio, or discover 928 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Air Canada.

The price-to-sales (P/S) ratio is a particularly useful valuation measure when analyzing companies that are either coming out of losses or have fluctuating profit margins, as is often the case in the airline industry. Since Air Canada has experienced volatile earnings and recovery is still underway, the P/S ratio provides a straightforward lens to gauge how the market values the company’s revenues, regardless of short-term profitability.

Growth potential and risk profile are crucial factors in determining what constitutes a “normal” or “fair” P/S ratio. Investors typically assign higher ratios to companies with solid growth prospects and lower perceived risks, while more mature or riskier businesses tend to command lower ratios.

Air Canada is currently trading at a P/S ratio of 0.26x. For context, the airline industry average P/S sits at 0.61x, while the peer group average is a much higher 26.36x. This highlights the diversity in business models and geographic exposure among airline peers. Simply Wall St’s proprietary Fair Ratio for Air Canada is calculated at 1.07x, which takes a more holistic view of the stock’s growth outlook, profit margins, scale, and the operational risks it faces.

The Fair Ratio is a more insightful benchmark than just comparing with industry or peer averages, as it tailors the expected valuation multiple to Air Canada’s specific circumstances, including projections for earnings, risk factors, and its competitive position in the sector.

With the current P/S ratio at 0.26x versus the Fair Ratio of 1.07x, Air Canada appears to be undervalued according to this approach.

Result: UNDERVALUED

PS ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1439 companies where insiders are betting big on explosive growth.

Earlier we mentioned that there is an even better way to understand valuation. Let us introduce you to Narratives, an easy yet powerful way to make investment decisions by connecting a company’s story to financial forecasts and, ultimately, to its fair value.

A Narrative is your personal investment thesis, where you interpret Air Canada’s business outlook, growth opportunities, and risks, and then link those views to specific forecasts for revenue, earnings, margins, and share price. Instead of just looking at historical numbers, Narratives let you craft and track your own scenario, explaining why you think Air Canada deserves a higher or lower value than what the market shows today.

On Simply Wall St’s Community page, used by millions of investors, you can create and share Narratives to visualize your expectations or see how others are analyzing Air Canada. As new information such as earnings reports or major news comes in, Narratives are updated in real time, helping you keep your investment case current.

Different investors may see Air Canada’s future very differently. One Narrative predicts strong international route expansion and share buybacks will drive growth and value the stock as high as CA$32.0. Another, more cautious Narrative focuses on rising labor costs and market risks, putting fair value as low as CA$17.4.

Do you think there’s more to the story for Air Canada? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Companies discussed in this article include AC.TO.

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