2 TSX Stocks Poised for Growth in June

Investing in stocks that trade below their intrinsic value has been a time-tested strategy for equity investors aiming for outsized gains when market sentiment shifts. Identifying a portfolio of undervalued stocks can lead to significant returns as the market corrects itself over time. Here, we discuss two TSX growth stocks, Air Canada and Magna International, which are currently trading at a discount and have the potential to offer substantial gains. 

Air Canada (TSE: AC) 

Air Canada (TSE: AC), with a market cap of $6.16 billion, is the largest airline in Canada, providing scheduled passenger services across the country. Despite the company’s robust performance, the stock price remains 67% below its all-time highs. This underperformance can be attributed to the significant debt burden that Air Canada accumulated during the COVID-19 pandemic. The airline industry was one of the hardest hit, and Air Canada had to take on substantial debt to stay afloat. Rising interest rates have further exacerbated the issue, leading to higher interest payments and thinner profit margins. At the end of 2019, Air Canada’s net debt stood at $2.37 billion, but it had ballooned to $3.78 billion by Q1 2024. 

Despite these challenges, Air Canada has shown remarkable resilience. Over the past 12 months, the company reported an adjusted EBITDA of over $4 billion, resulting in a net-debt-to-adjusted EBITDA ratio of just 0.9 times. This indicates that Air Canada’s earnings are sufficiently robust to cover its debt obligations comfortably. In Q1 2024, Air Canada’s operating cash flow was $1.59 billion. After capital expenditures of $536 million, the company ended the quarter with a free cash flow of $1.05 billion, up from $987 million in the same period last year. This positive cash flow has enabled Air Canada to reduce its long-term debt significantly, from $13 billion to $11.28 billion in the last three months alone. 

Air Canada’s debt reduction efforts have borne fruit, with the company reducing its net debt by more than 50% in the past 15 months. This financial prudence has bolstered the bottom line. Additionally, with $10 billion in total liquidity, Air Canada is well-positioned to invest approximately $15 billion in capital expenditures through 2028. These investments are expected to drive future earnings and cash flows higher. Currently priced at 4.9 times forward earnings, Air Canada is one of the cheapest stocks on the TSX, trading at a 56% discount to consensus price targets. 

Magna International (TSE: MG)

Magna International (TSE: MG), valued at $16.9 billion by market cap, is another TSX stock that has lagged the broader market in recent years. This auto ancillary giant trades 53% below its all-time highs, presenting an excellent opportunity for investors. The stock’s current valuation allows shareholders to enjoy a 4.4% dividend yield while buying a blue-chip company at a discount. Despite the challenging macroeconomic environment, Magna increased its sales by 3% year over year to $11 billion, outperforming the 2% increase in global light vehicle production. 

Magna is on track to increase its sales by 2.8% to $60.1 billion in 2024, with an expected earnings growth of 4.7% for the year. Priced at 7.5 times forward earnings, Magna stock is attractively valued. The company’s earnings are forecast to expand by 16.4% annually over the next five years, suggesting a significant acceleration between 2024 and 2028. This expected growth in profit margins is likely to result in increased dividend payouts. Over the past decade, Magna has more than tripled its dividend distributions, reflecting its commitment to returning capital to shareholders. 

Magna’s robust performance is underpinned by its strategic initiatives and strong market position. The company’s focus on innovation and its diversified product portfolio have enabled it to navigate industry challenges effectively. As the automotive industry transitions towards electric vehicles (EVs) and advanced driver-assistance systems (ADAS), Magna is well-positioned to benefit from these trends. The company’s investments in new technologies and partnerships with leading automakers are expected to drive future growth. 

Both Air Canada and Magna International present compelling investment opportunities for June 2024. Air Canada’s significant debt reduction and strong liquidity position, coupled with its ongoing investments, suggest that the airline is well-placed to capitalize on future growth. Similarly, Magna International’s attractive valuation, robust dividend yield, and growth prospects make it a blue-chip stock worth considering. Investors looking for undervalued TSX stocks with potential for outsized gains should consider adding these two companies to their portfolios. 

Shareholders to Applaud Magna International's (TSE:MG) Earnings

Despite Magna International Inc.'s (TSE:MG) recent earnings announcement disappointing investors, a closer analysis reveals some reassuring factors underlying the profit numbers. Let's delve into the impact of unusual items on profit and assess the company's earnings potential amid concerns raised by investors. 

Unraveling the Impact of Unusual Items on Profit 

Magna International's profit results were dampened by a US$388 million expense attributed to unusual items. While such deductions may initially disappoint investors, it's essential to recognize that significant unusual items are often not recurring. Therefore, if Magna International avoids similar expenses in the future, we can anticipate an improvement in profitability over the coming quarters. This could be positive news for TSX consumer shares, as Magna is a major supplier to the automotive industry and improved profitability could lead to increased spending on car parts and other consumer goods. However, it's important to remember that the overall health of the TSX consumer sector will depend on a variety of factors, not just Magna's performance. 

Insight into Magna International's Profit Performance 

Despite the setback caused by unusual items, there are indications that Magna International's earnings potential remains promising. The company's earnings per share have shown an impressive growth rate over the last year, suggesting underlying strength in its operations. While assessing statutory earnings is essential, it's also crucial to consider other factors such as analyst forecasts to gain a comprehensive understanding of the company's performance. 

Exploring Additional Insights 

While we've focused on a specific data point to analyze Magna International's profit, there's always more to uncover by delving into finer details. For instance, evaluating return on equity and insider trading activity can provide valuable insights into the company's business economics and investor sentiment. By examining these additional factors, investors can gain a more holistic view of Magna International's potential for long-term success. 

Conclusion 

In conclusion, while Magna International Inc.'s recent earnings announcement may have disappointed investors initially, a deeper analysis reveals underlying strengths and potential for future growth. By understanding the impact of unusual items on profit and considering factors such as earnings per share growth and analyst forecasts, investors can make informed decisions about their investment in Magna International. It's crucial to look beyond the surface and explore various metrics to gain a comprehensive understanding of the company's performance and prospects.