Avoid Westjet’s stock right now, Paradigm Capital says

Its first unprofitable quarter in thirteen years has Paradigm Capital analyst Corey Hammill cutting his price target on Westjet (TSX:WJA).

On Tuesday, WestJet reported its Q2, 2018 results. The company lost $20.75-million on revenue of $1.09-billion, a topline that was up a shade over the $1.06-billion the company posted in the same period last year.

“The impact of the threat of industrial action, in combination with the dramatic increase in fuel price and competitive capacity provided particularly significant challenges in the second quarter,” CEO Ed Sims said. “While we are disappointed with these results, all WestJetters can take great satisfaction from the successful delivery of key strategic initiatives like Swoop and WestJet Link.”

Hammill says that while the quarter beat the street’s expectations, the company didn’t offer much in the way of hope for a stock that has been falling for much of 2018.

“WJA shares traded down ~13% on the back of weak y/y quarterly results, Q3 guidance and increased uncertainty surrounding the airline’s outlook for 2019 and beyond,” the analyst says. “The timing of the rise in jet fuel prices, combined with the full plate of new initiatives underway (labour issues, new management, ULCC Swoop launch, International widebody expansion), led to the first unprofitable quarter in 13+ years. As investors saw with Air Canada (AC-T, $32.00 TP, Buy) and the launch of its leisure subsidiary rouge and international expansion, these seats are typically dilutive to unit revenue although still accretive to overall profitability. We expect a similar trend at WJA.”

In a research update to clients today, Hammill maintained his “Hold” rating but lowered his one-year price target on the stock from $18.00 to $16.00, implying a return of negative five per cent at the time of publication, including dividend.

Hammill thinks WJA will post EBITDAR of $675-million on revenue of $4.76-billion in fiscal 2018. He expects those numbers will improve to EBITDAR of $829-million on a topline of $5.34-billion the following year.