Risky assets like equities again turned into the limelight after easing inflation this year. While growth stocks have seen a handsome uptick so far, they are still trading way lower compared to their three-year highs. The potential bull rally on easing macroeconomic woes will likely send them further higher. Here are some TSX stocks that offer strong growth prospects.
Air Canada
Canada’s biggest passenger airline Air Canada (TSX:AC) has been trading muted for years. In the last 12 months, it has lost 15% and is currently trading close to the levels it was at three years ago. In comparison, the south of the border peers recovered quite sharply and have outperformed AC stock by a big leap. Even the TSX Composite Index has returned 35% in the same period.
However, Air Canada could end its poor spell and emerge brightly this year. That’s because the losses and cash burn may end soon with profitability in sight. Strong travel demand and operational efficiency will likely make the flag carrier’s cash flow positive again in 2023.
After losing billions in the last two years, Air Canada reported $2.37 billion in cash flow from operations. Its free cash flow came in at $796 million last year, which was a big respite for AC and its investors.
Fuel inflation and a recessionary environment might delay Air Canada’s recovery, though. However, the management has provided an optimistic outlook in the last quarterly earnings. It gave guidance for adjusted operating profit of $2.75 billion in 2023 and $3.75 billion in 2024.
Based on the guidance, AC stock is trading at a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation of four, which is lower than peers.
This indicates that the AC stock is discounted compared to peers and could outperform if the guidance materializes. Its huge debt pile will also be less concerning if the said operating profit is achieved. So, a return to profitability and lower leverage could be key growth triggers for AC stock going forward.
Aritzia
Aritzia (TSX:ATZ) is a vertically integrated fashion brand that mainly operates in the North American market. It has returned -5% in the last 12 months and 150% in the last three years. With an impending recession and a potential drop in discretionary spending, ATZ might fare poorly in the short term. However, driven by its fundamental strength, we might see significant value creation in the long term.
Aritzia operates over 114 boutique stores in North America, with 68 in Canada and 46 in the United States. Beyond its brick-and-mortar stores, Aritzia has e-commerce operations in more than 200 countries. Notably, its e-commerce segment has been growing fast, and its contribution has doubled in the last three years.
Aritzia’s strong execution is quite visible in its financials. Its free cash flow has grown by a stellar 62% compounded annually in the last five years. Its return on equity averaged around 30%, highlighting its superior profitability.
For 2027, Aritzia management has given a guidance of $3.65 billion in revenues, indicating a 16% growth compounded annually. Its above-average revenue growth and stable margins will likely create shareholder value. Moreover, higher contribution from the e-commerce vertical underpins an argument for growing margins.
ATZ stock is currently trading 26 times its earnings. This is discounted compared to its historical average and indicates considerable growth potential.
