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Why This TSX Index Stock Will Profit From a Stronger Loonie

After trending down for years, the Canadian dollar is finally starting to pick up. For many Canadian investors, that’s very bad news. A large number of Canadian companies make money off trade with the United States, whether directly (exporters) or indirectly (transportation companies). As a result, a stronger loonie can result in slimmer profit margins and slower earnings growth.

If the appreciation in the loonie continues, companies like banks, manufacturers and railways may see their earnings go down. These companies make up a large percentage of TSX stocks, so investors may have to brace for a sour experience in the second half of 2019.

However, there’s one stock that’s unambiguously poised to profit from a stronger loonie — a stock that has risen a dizzying 300% in just three years and shows no sign of slowing down. If you’d bought this stock at its lowest prices in 2009 or 2012, you’d be up thousands of percentage points. And now, it could stand to benefit from an increase in travel to the United States.

What’s the name of the stock?

It’s Air Canada (TSX:AC)(TSX:AC.B).

Why Air Canada benefits from a strong loonie

Air Canada benefits from a strong loonie in two ways.

First, as Fool contributor Joey Frenette has pointed out, the company could enjoy increased business, as more Canadians take vacations to the States. A weak dollar generally holds Canadians back from travelling down south, as the higher prices past the border are a deterrent. But when the dollar approaches parity, trips to the U.S. tend to rise — and with them, airplane rides. As Canada’s biggest airline, Air Canada will be the main beneficiary of all of this.

A second way that a higher loonie could help AC’s stock is by reducing expenses A high percentage of airplane manufacturing goes on in the U.S., and Air Canada buys aircraft and parts from companies like Boeing. An increase in the value of the Canadian dollar, therefore, could lower the company’s expenses.

An incredible run

Even with a weak dollar, Air Canada has been on a great run. So far this year, it’s up about 59%, and it’s up over 300% in just three years. This is incredible growth — especially for an established “blue-chip” stock. Even more incredibly, it’s arguably justified by fundamentals, as Air Canada grew its revenue by 9% and operating income by 47% in its most recent quarter.

Will the loonie keep appreciating?

It’s all well and good to know that a stronger loonie would benefit Air Canada. The bigger question is whether the rise in CAD/USD will persist. Oil has been fairly bullish lately, which certainly helps, but apart from that, it’s hard to know what’s driving the rally.

America’s economy is still growing at a much faster rate than Canada’s, which lost 2,200 jobs last month, so those macro factors would not predict what we’re seeing. However, it’s possible that Canada’s economy is in the midst of a recovery that we won’t hear about until the next reporting period, so don’t count that out. Overall, it looks like oil prices are the main factor behind CAD’s rise, which is good because the bullishness in oil is expected to persist, but if some other factor is responsible, then things could play out differently.

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Fool contributor Andrew Button has no position in any of the stocks mentioned.

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