Air Canada (TSX:AC) has perhaps the lowest price-to-earnings ratio on the TSX.
In 2016, the company earned $876 million, or $3.11 per share. The stock currently trades at $13.28. This gives the company a price-to-earnings ratio of just 4.3.
In a market where the average stock trades closer to 20 times earnings, it’s hard to let a tiny P/E ratio like that go unnoticed.
There are other things to like about Air Canada. It, along with Westjet Airlines Ltd. (TSX:WJA), has a dominant duopoly which keeps domestic fares high. International operations continue to be strong, and long-term growth in routes to Europe and Asia looks attractive.
Additionally, Air Canada is flush with cash; it exited 2016 with nearly $3 billion in cash and short-term investments.
Plus, Warren Buffett has been putting capital to work in the sector, which has attracted a new breed of investors who largely wrote off the entire airline industry.
Analysts don’t see earnings falling off a cliff, either. 2017’s earnings are projected to be $2.76 per share before recovering in 2018 to $3.19 per share.
But before investors rush out to load up on cheap Air Canada shares, keep in mind the reasons why the stock is so cheap. Some investors feel the company’s earnings will take a hit if the price of fuel goes back up.
In addition, two ultra-low cost airlines are planning to start up in Canada, which could also threaten Air Canada’s enviable market position. Ultimately, there’s a reason why Air Canada shares have such a low P/E ratio.
Still, there’s a lot to like. Most companies with a P/E less than 5 come with major warts. Air Canada is no exception.
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