Better Buy: Air Canada Stock or Cineplex?

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Though Air Canada (TSX:AC) and Cineplex (TSX:CGX) belong to different sectors, they have a few things in common. Both suffered immense cash burn during the pandemic in the last few years but are now on their way to profitability. Another thing in common is that both of these stocks have not yet breached their pre-pandemic highs and have notably disappointed investors.

Air Canada stock has lost 20% in the last 12 months, while Cineplex has lost 35%. In comparison, the TSX Composite Index has declined by 5%.

Cineplex has been seeing an encouraging surge in the number of moviegoers. In the last six months, it reported a net income of $41 million on total revenues of $690 million. In April 2023, Cineplex saw record combined box office collections and food service revenues at $105 million. The Canadian theatre giant will report its first-quarter (Q1) 2023 earnings on May 12.  

Higher revenue growth and improving margins could drive CGX stock higher this year. However, lower consumer spending might weigh on its revenues in the next few quarters.

Another concerning aspect of Cineplex is its huge debt burden. At the end of Q4 2022, it had total debt of $1.9 billion, indicating a worrisome leverage ratio of over nine. Its pending settlement with Cineworld could provide a huge respite, but it could take time.

Cineworld walked out of its proposed merger with Cineplex in April 2020 and, thus, is liable to pay $1.24 billion. However, Cineworld declared bankruptcy last year, making the settlement with Cineplex all the more uncertain.

Potential profitability makes Cineplex an attractive stock. However, the uncertainties the macro challenges would bring and its debt load make it a relatively risky bet.

Air Canada is also a re-opening play eyeing long-term profitability. A surge in air travel demand and the flag carrier’s stellar operational performance led it to profits in Q4 2022. This marked its first quarter of positive net income in the last three years. The airline reported a net profit of $168 million for the quarter that ended on December 31, 2022.  

And this seems just to be the start! On May 4, Air Canada management increased its guidance for 2023 based on higher demand and lower-than-expected fuel prices. Now it expects AC to see adjusted operating profits of $3.75 billion, up from its earlier guidance of $2.75 billion. The revision indicates more certainty about its recovery, which will likely bring cheer among AC investors.

Air Canada also has a big debt burden and currently has a leverage ratio of around six. However, if the guidance materializes, that should not matter much. Plus, based on the updated guidance, AC stock is currently trading at an enterprise value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) valuation of four. That’s a steep discount against the industry average of six.

Considering the earnings growth visibility and its market position, AC should trade at the industry multiple. So, we might see valuation re-rating and AC stock creating considerable shareholder value.