Market volatility is a boon if used wisely. Everybody suffers when the market takes large swings. But amid these large swings, discerned investors seize long-term winners. This time as well, market volatility has brought some quality names below their fair values. Here are two undervalued TSX stocks that offer handsome growth potential.
The recent market turmoil has notably weighed on Air Canada (TSX:AC) stock, bringing it down 20% since February. And the weakness might continue in the short term, given the impending recession and ensuing hit to travel. However, Air Canada looks well placed to outperform in the long term. So, the recent correction could be an opportunity.
There has been no respite for Air Canada investors due to back-to-back challenges. The pandemic, movement restrictions, and now recession fears have hit its stock. However, the management is seeing the light at the end of the tunnel. Its guidance for the next two years is quite optimistic and suggests that the stock is undervalued.
Air Canada management aims to achieve an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of $2.5-$3.0 billion this year, indicating an 88% growth against 2022. For 2024, the management expects an adjusted EBITDA of $3.5-$4.0 billion.
So, AC stock is currently trading at a forward EV (enterprise value)-to-EBITDA ratio of five, which is lower than the industry average.
Considering strong execution over the years and encouraging demand, Air Canada will likely achieve said guidance. It has a strong balance sheet with manageable debt and a sound liquidity position. The leverage ratios will fall below the industry average if the guidance materializes.
Air travel demand will be a crucial driver for Air Canada’s profitability going forward. Its revenues have grown by more than 200% in the last 12 months compared to an earlier comparable period. A key risk is a severe recession, which could break this streak and might further delay its profitability.
Energy remains one of the disliked sectors, despite some of the fundamental improvements. The disproportionate drop so far this month on the banking crisis speaks for itself. However, some TSX energy names look well placed to outperform later in the year. One of them is Whitecap Resources (TSX:WCP).
WCP stock has remained relatively resilient compared to peers during the recent market turmoil and has lost 8% since last month.
Strong free cash flow growth and massive debt reduction make Whitecap an attractive bet. In 2023, it is expected to pay a dividend of $.58 per share, indicating an attractive yield of 6%. It intends to raise shareholder payouts to $0.73 per share. Interestingly, the company is in such a sound financial shape that even if oil prices fall to US$50 per barrel levels, the dividend is still sustainable.
WCP stock has returned 7% in the last 12 months and almost 1,000% since the pandemic. It is trading seven times its 2023 free cash flow and looks undervalued. The stock might soon hit bottom and could start recovering.
Its exposure to oil prices and the sector’s innate volatile nature make WCP a risky bet. However, given the balance sheet improvement, dividend stability, and earnings-growth prospects, WCP could create notable shareholder value.