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.

| More on:
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

Senior uses a laptop computer
Retirement

Retirees: 2 TSX Dividend Stocks You Can Probably Hold for 10 Whole Years

These TSX dividend socks have sustainable payouts and are better positioned to deliver reliable income and growth over time.

Read more »

pregnant mother juggles work and childcare
Bank Stocks

Investing Doesn’t Have to Be Complicated – This 1 Stock Is Proof

TD Bank stock has been a reliable and resilient performer, creating long-term wealth for investors.

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

Before You Buy a Covered-Call ETF, Check These 3 Numbers

A covered-call ETF’s big “yield” can hide return-of-capital and capped upside, so check the numbers that show what you’re really…

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Monday, September 14

After suffering its worst weekly decline since March, the TSX faces another key session today as investors weigh Canada’s inflation…

Read more »

some investments are riskier than others
Stocks for Beginners

These 2 Popular ETFs Look Similar: 1 Could Carry Far More AI Risk

TEC and XQQ look similar, but TEC is far more concentrated in tech and Nvidia, making it a bigger AI…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

Which Canadian Dividend ETFs Pay the Most Right Now?

Hamilton Utilities Yield Maximizer ETF (TSX:UMAX) could be the ultimate passive-income play to outpace inflation and a lower-yield world.

Read more »

oil pumps at sunset
Energy Stocks

Enbridge Stock: Should Investors Buy, Sell, or Hold Right Now?

Is Enbridge now oversold?

Read more »

dividend stocks are a good way to earn passive income
Dividend Stocks

This Dividend Stock Is One I’ll Never Sell — Here’s Why

Fortis (TSX:FTS) stock stands out as a dividend-paying, sleep-easy kind of name to buy and never sell.

Read more »