Despite the rebound staged by the equity markets in 2023, there are several TSX stocks trading much below their intrinsic value. Here are two such undervalued TSX stocks you can consider buying in September 2023 and benefit from outsized gains over time.
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Canadian Natural Resources stock
One of the largest energy companies on the TSX, Canadian Natural Resources (TSX:CNQ) commands an enterprise value of $106 billion. Despite trading close to all-time highs, CNQ stock offers shareholders a tasty yield of 4.1%.
In the second quarter (Q2) of 2023, CNQ reported an adjusted funds flow of $2.7 billion, demonstrating the advantage it enjoys from a diverse and balanced asset base. Its average daily production volumes stood at 1,194 MBOE/d in Q2, which was impacted by wildfires in Western Canada and third-party pipeline outages.
Canadian Natural delivered solid results in Q2 and reported adjusted net earnings of $1.3 billion, allowing it to return capital to shareholders via dividends and buybacks. In the first six months of 2023, CNQ has returned $4.3 billion to investors and has now increased dividends for 23 consecutive years. In this period, its dividends have risen by more than 20% annually, which is remarkable for a cyclical energy stock.
Canadian Natural Resources emphasized it is targeting strong production volume in Q2 of 2023, which should drive free cash flow higher. It is also looking to reduce net debt below $10 billion, after which the company aims to return 100% of free cash flow to shareholders.
During the Q2 earnings call, CNQ explained, “When you combine our leading financial results with our top tier reserves and asset base, this provides us with unique competitive advantages in terms of capital efficiency, flexibility and sustainability, all of which drive material free cash flow generation and strong returns on capital.”
Priced at 10.3 times 2024 earnings, CNQ stock is quite cheap, given its high dividend yield and robust cash flows.
Magna International stock
The second value stock on my list is Magna International (TSX:MG), an automotive supplier of seating, roof systems, chassis, powertrain, electronic systems, closure systems, electric vehicle systems, tooling and engineering, and contracted vehicle assembly. Magna derives 46% of sales from North America, while Europe accounts for 43% of revenue.
After touching record highs in 2021, Magna stock is down 40%, allowing you to buy the dip. Similar to other players in the automotive sector, Magna was impacted by supply chain constraints as it could not fulfill customer demand due to the lack of components. But the macro scenario is bound to improve for Magna and its peers on the back of pent-up demand.
For instance, its sales were up 17% year over year, while adjusted earnings surged by 81% in Q2 of 2023. It now forecasts sales between $41.9 billion and $43.5 billion this year, up from its previous forecast between $40.2 billion and $41.8 billion.
Despite the ongoing pullback, Magna has outpaced the broader markets, rising 125% in the past 10 years. Priced at 10 times 2023 earnings, Magna stock is widely undervalued and trades at a discount of 30% to consensus price targets. It also pays shareholders a dividend yield of 3.2%.
