WestJet stock has only modest upside, Paradigm Capital says

WestJet’s (Westjet Stock Quote, Chart, News: TSE:WJA) third quarter results have Paradigm Capital analyst Corey Hammill feeling a little more bullish about Canada’s number two airline, but not enough to recommend investors buy it.

On Tuesday, WestJet reported its Q3, 2017 results. The company earned $138.4-million on revenue of $1.22-billion, a topline that was up nine per cent over the $1.12-billion the company posted in last year’s third quarter.

“Today we reported our 50th consecutive profitable quarter, which included record earnings, margin expansion, positive year-over-year RASM growth and improved return on invested capital, as we achieved the highest ever quarterly load factor in our 21-year history and flew an all-time quarterly record number of guests,” said CEO Gregg Saretsky. “Our business fundamentals continue to strengthen, which combined with new strategic initiatives, including the launching of Swoop in the summer of 2018 and Boeing Dreamliner service starting in 2019, gives us great confidence in our ability to deliver sustainable profitable growth and earnings expansion. “I want to thank our more than 13,000 WestJetters for their dedication and energy in delivering our award-winning brand of friendly caring service, and I especially look forward to celebrating our success at the November profit share event.”

Hammill shared his outlook for WestJet’s immediate future.

“WestJet’s unit revenue (RASM) has now expanded for three consecutive quarters after nine quarters of decline. Given the strong pricing trends and improving revenue environment described by many North American peers, we expect WJA to post continued expansion in RASM in Q4/17 (guidance 2–4%). Based on our preliminary analysis of 2018 guidance, in order to meet the 2018 Street EBITDAR estimate, unit revenue will need to grow by ~2% (our est. currently +3%). Based on our outlook, this appears achievable. Looking toward the back half of 2018 and into 2019, unit revenue growth could be pressured as WestJet adds an increasing number of wide-body and ultra-low-cost seats to its mix. As investors saw with Air Canada, these international seats and additional stage length can be dilutive to unit revenue although still accretive to overall profitability.”

In a research update to clients today, Hammill maintained his “Hold” rating on WestJet, but raised his one-year price target on the stock from $22.50 to $28.00, implying a return of five per cent at the time of publication, including dividend.

Hammill thinks WestJet will generate EBITDAR of $1.01-billion on revenue of $4.49-billion in fiscal 2017. He expects those numbers will improve to EBITDAR of $1.14-billion on a topline of $4.98-billion the following year.

“In our opinion, WestJet remains one of the best-managed airlines in the world,” Hammill says. “The company has a track record of profitability, but current conditions in WestJet’s key Alberta market creates a heightened level of uncertainty in the short term.”

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