Why This Canadian Stock Could Be the Best-Kept Secret on Wall Street

Air Canada (TSX:AC) stock could be a mid-cap growth star that’s hiding in plain sight on the TSX.

Key Points
  • Air Canada may be a deep-value TSX stock despite the airline industry’s historic volatility, with signs the sector could be improving as new, more fuel-efficient aircraft change the economics. Even with near-term risks like high oil prices and trade-war uncertainty, Air Canada’s recent resilience, debt reduction, and potential AI-driven efficiency gains could support better margins and returns over the next decade.
  • Even with near-term risks like high oil prices and trade-war uncertainty, Air Canada’s recent resilience, debt reduction, and potential AI-driven efficiency gains could support better margins and returns over the next decade.

Air Canada (TSX: AC) may already be a household name, but in my very humble opinion, it’s one of the best deep-value stocks that is hiding in plain sight on the Canadian stock market. Indeed, the airlines can be really tough to invest in.

Historically, they’ve offered quite the turbulent ride (apologies for the pun) for investors, thanks in part to high overhead costs and their sensitivity to the state of the economy. While the operating economics are quite choppy, I think that the rear-view mirror isn’t a sign of what’s to come for an industry that I believe stands to evolve significantly over the next five to seven years.

woman considering the future

Source: Getty Images

It’s time to give airlines a second look

Indeed, perhaps the biggest tell that it’s time to embrace the airlines is the fact that Warren Buffett’s Berkshire Hathaway (NYSE: BRK.B) has returned to the industry. While it’s unclear who made the airline investment (and it’s a relatively small bet), especially since the Oracle of Omaha is now retired, I think that the move points to favourable industry changes to come.

With new aircraft clocking in seriously impressive fuel-efficiency gains, questions linger as to just how much industry economics stands to improve. Of course, it’s unlikely, at least in my view, for the likes of Air Canada to just pocket the fuel savings, especially since jet fuel spikes can happen (as they have recently with the soaring of oil prices in response to the geopolitical chaos in the Middle East). In any case, the long-term structural shift, I think, isn’t quite priced into a name like Air Canada.

A mid-cap gem with longer-term tailwinds beyond those nearer-term inflationary headwinds

The airline boasts a mere $7.7 billion market cap (it’s a mid-cap), and while it’ll take some time to return to those pre-pandemic heights, I think that the better-managed firm is on the right track already. Even with the latest dip in the shares, they’re still up close to 47% in the past 52 weeks.

With the spike in oil, that’s some serious resilience, which, I think, extends well beyond this hot travel season. In the meantime, jet fuel headwinds could weigh heavily, but I’d view the pressure as more of a buying opportunity than a sign that it’s time to book profits and run for the hills, especially as the best of the summer travel season comes to an end.

As Air Canada chips away at the debt on its balance sheet while looking to benefit from future aircraft that stand to be even more aerodynamic and, with that, fuel-efficient, we could be moving into an era where flight costs contract considerably due to advancements in the next generation of aircraft. For Air Canada, that means potential sales growth coincides with decent margin expansion.

The bottom line

Add AI operations-smoothing initiatives into the equation, and it’s more apparent that shares of AC have a pretty promising stage set for the next decade and beyond. Of course, in the meantime, trade war turbulence and soaring fuel costs remain a pressure point, which is more transitory in nature than anything else. While I wouldn’t load up on a 10% dip, AC shares are an enticing name to stash on a radar as the fall and winter season approaches.

Fool contributor Joey Frenette has positions in Berkshire Hathaway. The Motley Fool recommends Air Canada and Berkshire Hathaway. The Motley Fool has a disclosure policy.

More on Investing

A meter measures energy use.
Energy Stocks

Rates Are Rising Again: Is Emera Still a Sensible Retirement Stock?

Emera still offers retirement income, but borrowing costs and per-share earnings decide how comfortably that payment can grow.

Read more »

ETFs can contain investments such as stocks
Dividend Stocks

How to Use a TFSA to Generate $200 in Monthly Tax-Free Income

Use a TFSA to build $200 in monthly tax-free income with XEI and ZRE. See how these ETFs work and…

Read more »

Business success of growth metaverse finance and investment profit graph concept or development analysis progress chart on financial market achievement strategy background with increase hand diagram
Dividend Stocks

Smart Ways to Invest Extra Income and Say Goodbye to Financial Stress

Canadians have ways to make their extra income work as hard as they do and say goodbye to financial stress.

Read more »

how to save money
Energy Stocks

How Much Would You Need to Invest in Enbridge to Average $200 a Month?

Enbridge’s current dividend needs roughly $42,600 in shares to average $200 monthly, with payments arriving every quarter.

Read more »

Two seniors walk in the forest
Dividend Stocks

Sun Life Stock Pays 3.3%: How Much to Invest for $100 a Month in Dividends

Sun Life Financial (TSX:SLF) might be a massive bargain after Thursday's vicious plunge as stock markets sold off hard.

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

How to Turn Your TFSA Into $1,000 a Month in Tax-Free Income

Build toward $1,000 a month in tax-free income with a TFSA. See how Enbridge, Scotiabank and ZWC could help, and…

Read more »

customer fills up car with gasoline
Dividend Stocks

How Much Emergency Money Do Canadians Actually Need?

A safety fund equivalent to 3 to 6 months of living expenses is generally the baseline buffer that Canadians would…

Read more »

Piggy bank in autumn leaves
Bank Stocks

Rates Are Rising Again, So Are GICs and High-Interest Savings ETFs Even Worth It?

The Bank of Canada hiked rates to 2.50%. See what a GIC or the Purpose savings ETF earns on $10,000…

Read more »