Take a pass on WestJet, Beacon Securities says

WestJet’s (WestJet Stock Quote, Chart, News: TSX:WJA) revenue guidance for the current quarter is down a notch, which is cause for a price target drop, says analyst Ahmad Shaath with Beacon Securities.

On Thursday, WestJet delivered its traffic report for the month of February, which included revised estimates for RASM (revenue per available seat mile) and domestic capacity. RASM numbers came in at a year over year increase of 2.5 to 3.5 per cent as opposed to the previous guidance of 4.5 to 5.5 per cent, whereas domestic capacity dropped two percentage points from a 7.5 to 8.5 per cent increase to 5.5 to 5.6 per cent.

The company blames the lower growth rate on weather issues over January and February.

“The severity and length of weather events limited options for guest recovery, reduced revenues from providing WestJet guests with atonement, drove higher guest cancellations and impacted the ability to capture revenue from last minute high-yield bookings,” says the company in a statement.

In a client update on Thursday, Shaath has revised his Q1/FY18 estimates as a result. “Our Q1/FY18E EPS estimate is severely impacted, as we now expect it to be $0.39 vs $0.54 previously (~28% revision). This results in our FY18E EPS estimate revised downward by ~6%,” says the analyst.

Shaath notes WestJet’s other recent newsmaker, the retirement of CEO Gregg Saretsky, effective immediately. The move (WestJet has appointed Ed Sims, the company’s executive vice-president commercial as the new CEO) only adds to the pressure, says Shaath.

Mr. Saretsky’s retirement comes at a critical point, in the middle of WJA’s launch of the ULCC Swoop (which is facing a lot of pushback from WJA’s pilots) and its wide-body program.

“We are revising our target price to $25.50 (from $27.00) based on 10x (unchanged) our revised FY18E EPS estimate,” says the analyst. “The negative guidance revision combined with leadership changes at this critical point in time for WJA should put material pressure on the shares in the short- to-medium term. We also note that this negative RASM guidance should put short-term pressure on the sector in general.”

The analyst maintains his “Hold” recommendation for WJA, while his revised target of $25.50 represents a potential 12-month return of three per cent at the time of publication.

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