Forget Air Canada (TSX:AC): Buy This Diversified Airline Stock Instead

Everyone loves Air Canada (TSX:AC), but Onex Corporation (TSX:ONEX) might be the better airline stock to buy today. Here’s why.

| More on:
Where to Invest?

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Many retail investors are invested heavily in Air Canada (TSX:AC), steadfast in their belief Canada’s largest airline stock will recover. People will fly again. It’s only a matter of time.

But an investment in Air Canada isn’t nearly that simple. If air travel bounces back quickly, Air Canada shares should be a solid short-term investment. But what if they don’t? The airline stock could struggle for years if numbers don’t come back.

Remember, flying is most efficient if the plane is full. Air Canada will struggle if it’s forced to fly with half-empty planes, something governments could force on the industry to help keep passengers safe.

Ultimately, most investors don’t know what the air travel world will look like six to 12 months from now. Yes, Air Canada just raised a bunch of cash via equity and debt offerings, but nobody really knows if the fresh $1.6 billion in the company’s coffers will be enough to make it through this storm.

Investors looking for airline stock exposure might want to take a different approach. Let’s take a closer look at how you can do this, a move that could very well end up as a safer way to play this volatile industry.

Remember Westjet?

Many investors promptly ignored Westjet after the company was acquired by Onex Corporation (TSX:ONEX). These folks — myself included — were disappointed an excellent Canadian airline stock was no longer available for investment.

But perhaps investors should look at things a little differently. An investment in Onex today gives them substantial airline exposure as well as a whack of other assets.

As I type this, Onex shares trade at approximately $67 each, recovering nicely from March’s lows of below $40 per share. The stock is still down a little bit from the $80-$90 range shares traded at back in January and February, but long-term holders have to like the recovery.

Onex is essentially two separate businesses. The first part uses shareholder capital, outside money, and debt to make investments in both public and private companies. Westjet is one of the largest positions, but it’s certainly not the whole company. Onex has stakes in dozens of investments.

The other part of the company is asset management. How this works is relatively simple. Onex uses its own cash to begin a private equity fund. It attracts other investors to the fund. It then collects management fees on the outside investments. This part of the company has grown substantially, and recently surpassed $300 million in annual revenue.

The investment case

Onex is a compelling investment on a sum-of-the-parts basis.

At the end of the first quarter, Onex’s investments were worth a little more than $77 per share. Remember, that was when the market had barely recovered from the bottom and investors were incredibly pessimistic. The value of the portfolio — including the stake in Westjet — has undoubtedly recovered even further.

Remember, shares currently trade hands at just over $67 each, so investors are buying at a nice discount to the sum of the parts.

There’s also the asset management business. That part of the company earned $80 million in profits in 2019 and is growing nicely as assets under management increase. If we value it at just 10 times earnings, that’s an extra $800 million. There are approximately 100 million shares outstanding, which adds an additional $8 per share to our valuation.

Add it all together and this quasi-airline stock is worth approximately $85 per share on a conservative basis. Investors can buy today at $67 per share — a discount of more than 20% of the parts.

The bottom line on this airline stock

The beautiful part of Onex is that it allows investors access to the airline sector without putting all their eggs in that volatile market. They’re also getting an interesting opportunity on valuation perspective. It’s nice to buy assets for less than what they’re worth.

Add in Onex’s consistent share repurchases, its steady dividend, and its sharp management team and it combines to be a pretty compelling investment thesis. It sure looks a lot better than simply buying a risky airline stock and hoping for the best.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any of the stocks mentioned.

More on Dividend Stocks

edit Back view of hugging couple standing with real estate agent in front of house for sale
Dividend Stocks

Why Real Estate Stocks Are a No-Brainer Addition to Your Portfolio

Real estate stocks, especially REITs, offer some distinct advantages over other types of stocks, making them must-have additions to most…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

3 Top TSX Dividend Stocks to Buy for Monthly Passive Income

Top TSX stocks with monthly dividends now trade at cheap prices for investors seeking passive income.

Read more »

Canadian Dollars
Dividend Stocks

Create Free Passive Income and Turn it Into Thousands With 1 TSX Stock

If you can't afford to invest, you can certainly create passive income another way and use that to invest in…

Read more »

Payday ringed on a calendar
Dividend Stocks

Canadian Dividend Investors: 2 ETFs That Pay Monthly Income With High Yields

Dividend ETFs often pay out monthly distributions compared to dividend stocks.

Read more »

think thought consider
Dividend Stocks

2 Stocks I Own and Will Buy More of if They Fall

Stocks tend to go up in the long run. Therefore, buying a basket of diversified stocks on dips should lead…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

2 Oversold TSX Dividend Stocks to Buy for Passive Income

Blue-chip dividend stocks such as Royal Bank of Canada and Manulife Financial pay investors a tasty forward yield.

Read more »

TFSA and coins
Dividend Stocks

TFSA Passive Income: 3 Solid Stocks to Earn $355 Every Month

Looking to earn steady passive income? Here are three solid TSX stocks that can help you earn a worry-free passive…

Read more »

Dividend Stocks

RRSP Investors: 2 Stocks to Buy in August for Dividends and Capital Gains

RRSP investors can still find top TSX dividend stocks trading at cheap prices today for a buy-and-hold portfolio.

Read more »