WestJet is still facing headwinds, Paradigm Capital says

WestJet (WestJet Stock Quote, Chart: TSX:WJA) returned to profitability in its third quarter but it wasn’t enough to move the needle for analyst Corey Hammill of Paradigm Capital who says that the airline’s expansion plans are likely to pressure results over the near term.

WestJet posted an earnings beat in its Q3, coming in at $45.9 million or $0.40 per share, better than the expected $0.33 per share but significantly lower than last year’s third quarter profit of $135.9 million. Revenue for the quarter was $1.26 billion, an increase from Q3/2017’s $1.21 billion.

Headwinds the company is now facing include higher fuel costs and growing pains linked to the launch of its discount carrier Swoop as well as the introduction of its Boeing 787 widebody transatlantic service, says Hammill.

“The earnings beat is not enough for us to recommend moving into shares of WestJet,” Hammill says in a client update on Wednesday. “We expect the combination of rising fuel and the overall expansion of WestJet’s business into ultra low-cost and trans-atlantic service will act as a headwind for unit revenue growth.”

“We are also watching the airline’s leverage ratio. It is above 2x for just the second time in over 10 years. Based on our current forecast, we expect it will likely hit 3x before reversing course,” he says.

Hammill is maintaining his “Hold” recommendation for WJA and his $16.00 target price, which is based on a 4.5x his 2019 EV/EBITDAR estimate and represents a projected 12-month return including dividend of negative 13 per cent at the time of publication.