The Canadian market continues to hover around all-time highs. Yet even at these price levels, we can always find attractive undervalued Canadian stocks. This is what I’d like to discuss in this article.
Here are two undervalued stocks that I think investors should seriously consider buying.
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Cineplex: Expectations rising
The first stock, Cineplex Inc. (TSX: CGX), is one that I’ve highlighted numerous times over the last couple of years. And while Cineplex stock has continued to languish, the timing today looks better than ever. I think it’s extremely difficult to “time” the market, but I’ve been happy just owning this one and waiting.
So let me review my bullish case. Cineplex is Canada’s premier entertainment company, with movie theatre and gaming venues across Canada. Its market share is extremely high, and it operates in sort of a monopoly in the business.
Today, Cineplex stock trades at a very depressed multiple of 12 times next year’s expected earnings. The stock remains 68% lower than pre-pandemic levels, and investor sentiment is bad. These are all things that signal a value stock.
In conjunction with this, Cineplex’s business is showing signs of improvement. For example, last quarter’s box office revenue was at 98% of pre-pandemic levels. Also, expectations are rapidly moving higher. Cineplex will be reporting its third-quarter results tomorrow. Expectations are calling for earnings per share (EPS) of $0.12, which compares to prior expectations for EPS of $0.08.
Air Canada
The other undervalued stock that I’d like to highlight has a similar history to Cineplex, in that it was also decimated by the pandemic. Today, things are looking good yet Air Canada (TSX: AC) stock remains in deeply undervalued territory.
Trading at a mere seven times this year’s earnings, Air Canada stock sure has some work to do to win over the confidence of investors. Maybe the valuation remains so low because the business is so cyclical. Maybe it’s because investors are worried about the state of the economy. But no matter the reason, the truth is that Air Canada’s latest quarterly result speaks for itself.
Last week, Air Canada released its third quarter result which blew past expectations, clearly demonstrating how disconnected investor expectations had become. Adjusted EPS came in at $2.57 compared to expectations of $1.58, and free cash flow of $282 million was $147 million higher than the same period last year. All of this resulted in analyst estimates of target price increases. This sent Air Canada stock more than 15% higher after the release.
There’s no doubt that Air Canada still has its struggles ahead. I mean, the last quarter was not the greatest, as revenue fell 4% and adjusted earnings declined to $2.57 from $3.41. The worries remain the same: jet fuel prices remain high, pilot salaries have been renegotiated way higher, and the consumer may be at risk, with high consumer debt weighing on them.
For now, Air Canada stock is looking good as it’s benefitting from a re-rating, with expectations and target prices being lifted higher. Longer term, many risks remain but the stock remains undervalued today.
The bottom line
Both Cineplex and Air Canada have come a long way since the pandemic. They were among the hardest hit, and this hit their valuations. Today, they remain two interesting undervalued Canadian stocks to consider.
