The TSX Composite Index has been rallying for the last 30 days, but some stocks have been moving in the opposite direction. Investors are shifting away from companies with high debt to tech companies. Moreover, there are fears of recessions in mid-2024. So it won’t be shocking if high debt stocks continue their downtrend till June or July. Three TSX stocks are caught in the whirlwind. They might look like a value trap from their headwinds.
However, I suggest not looking at them now but their future three years from now. The shift from an economic crisis to a recovery takes at least three years. With this thought in mind, let us look at the following three stocks.
Magna International
Auto components maker Magna International (TSX:MG) overcame the pandemic, the semiconductor supply shortage, and selling Russian operations for a loss. It saw an improvement in its 2023 earnings as restructuring helped it improve operational efficiency. Moreover, an increase in light vehicle sales boosted its revenue.
Magna expects the cost savings from restructuring to continue to grow its profits. However, it expects a slow demand recovery in 2024 as high-interest rates and inflation push car buying to a future date. While the electric vehicle trend is still there, the sales growth is delayed until next year. Magna reported a tepid 2024 outlook but a strong 2025 and 2026 outlook.
While Magna can’t control demand, it can continue to work on technology and operating efficiency to prepare for the peak season. All this has increased its debt to US$7.4 billion. However, its leverage ratio has reduced to 1.9 times from 2 times in the third quarter, as it improved its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to US$3.9 billion. Moreover, it has a US$1.2 billion cash reserve to keep its operations running smoothly.
Magna has to get by this year without incurring a loss, and that seems possible with its cash reserve and EBITDA. Once the interest rate cuts begin, Magna may likely restructure its debt and see a demand explosion from postponed purchases due to high borrowing costs. At that time, Magna’s stock price could rally beyond $100.
BlackBerry stock
BlackBerry (TSX:BB) is also going through a rough patch. A lot is happening inside the company, and with the board and shareholders. It has great cybersecurity products but lacks aggressive marketing in a competitive landscape. In November 2023, BlackBerry hired a new CEO, John Giamatteo, who specializes in go-to-market strategy.
The company is undergoing a restructuring that will see the closing of some facilities to optimize costs and improve operational efficiency. Its strengths are government contracts. Overall economic uncertainty had those contracts’ signing delayed. Once the contract momentum picks up, the new revenue will flow through a more efficient cost structure, helping it turn operating cash positive by March 2025.
As for the Internet of Things business (IoT), a $640 million royalty revenue is stuck because of a slowdown in production. Once automotive demand and the EV trend kick in, this royalty revenue will be realized, and new growth will return.
If you look past the current headwinds, the company is in two high-growth markets with competitive products. BlackBerry’s unique blend of QNX operating system, endpoint security, and IVY vehicle data platform puts it in a sweet spot to benefit from the connected world of 5G and automated cars. Its potential is waiting to be unlocked. When that happens, BlackBerry could be a turnaround stock that makes its shareholders wealthy.
BCE stock
Another major restructuring is happening at BCE (TSX:BCE), with the company making massive layoffs and selling radio stations to focus on digital transformation. The management is making some tough decisions. Its significant debt has got the market worried if the company can continue its dividend growth. Some fear a dividend cut if cash dries up.
However, the chances of a dividend cut are thin as the company pays dividends from its free cash flow and any shortage can be met with its cash reserve. The stock could bottom out this year as it restructures. Though it could rally next year on the 5G wave.
