Market volatility sometimes has a disproportionate impact on selective names. Some TSX stocks are trading below their fair values and offer handsome growth prospects for long-term investors. Here are three of them.
Air Canada
Air Canada (TSX: AC) is on the road to profitability. After three years of losses and cash burn, the flag carrier seems well-placed for a handsome recovery.
AC stock is currently trading at 8 times its free cash flows. On a forward basis, it is trading at an EV-to-EBITDA (enterprise value-to-earnings before interest, tax, depreciation, and amortization) ratio of 4 times. In comparison, south-of-the-border airline companies are trading at a valuation of 6 times. That’s a steep discount compared to peers.
That’s because Air Canada’s handsome growth prospects and potential profitability have not been priced into the stock yet. In Q4 2022, Canada’s largest passenger airline reported stellar numbers and a net profit, its first in the last 12 quarters. The trend might continue this year as well if the macroeconomic challenges go easy on the aviation industry.
Inflation and an impending recession remain key risks for Air Canada. However, management expects operating profits of around $3.8 billion for next year. That sounds like a terrific recovery and massive growth in the making.
MEG Energy
TSX energy stocks offer striking earnings growth visibility amid strengthening balance sheets. Even with such fundamental strengths, they are trading at a discount compared to their historical averages. One such stock is MEG Energy (TSX: MEG).
MEG Energy has gained 26% in the last 12 months, notably beating its peers. The stock is currently trading 6 times its free cash flows and 8 times its earnings. This is undervalued compared to the industry average.
MEG Energy reported free cash flows of $1.5 billion last year, massive 320% growth over 2021. Net debt also halved last year, notably improving its leverage position. As the company achieves its debt reduction target later this year, a larger portion of its excess cash will be deployed towards shareholder returns.
MEG Energy is a low-cost thermal oil producer with some of the countries’ longest reserve lives. The company is expected to generate $700 million in free cash flows at current oil prices.
Bank of Montreal
Canada’s third-biggest bank by market cap, Bank of Montreal (TSX: BMO), is my third pick among the top value bets. Driven by the recent banking crisis and its increasing exposure to the US, BMO stock has dropped 10% since mid-February.
However, it looks appealing after the correction. It is currently trading at a price-to-book value of 1.2 times, at a discount compared to its historical average. The average price-to-book ratio of the Big Six Canadian banks is around 1.4 times.
BMO remains well-capitalized and offers stable return prospects. The bank’s common equity tier 1 ratio, a popular measure of banks’ financial strength, is at 18.2%. That’s way higher than the regulatory requirements and the highest among peers. This stock offers a stable dividend yield of 4.6%, in line with its peers.
