WestJet is still a wait-and-see stock, says Paradigm Capital

Following the company’s fourth quarter results, Paradigm Capital analyst Corey Hammill has raised his one-year price target on WestJet (WestJet Stock Quote, Chart TSX:WJA), though the analyst is not yet ready to recommend investors buy the stock.

On Tuesday, WestJet reported its Q4 and fiscal 2018 results. In the fourth quarter, the company posted net earnings of $29.2-million on revenue of $1.19-billion, a topline that was up 6.3 per cent over the same period last year.

“In 2018 we executed several significant milestones on our path to becoming a high-value global network airline,” CEO Ed Sims said. “As we enter 2019, we continue to build momentum and are well positioned to deliver on our strategic initiatives and expand margins. I would like to thank every WestJetter for their hard work through an especially busy holiday season culminating in our WestJet mainline business achieving the highest completion rate in North America in December, as measured by FlightStats.”

Hammill says it’s still too early to invest in WestJet, though there are some encouraging signs.

“WestJet is at the front end of a material expansion of its business,” the analyst says. “The next 2–3 years will be characterized by ongoing growth of its ultra low-cost carrier Swoop and the rollout of the new Boeing 787 wide-body transatlantic service. We are encouraged by management’s bullish outlook for unit revenue improvements through 2019, although we expect this will be a challenge. As we saw with Air Canada’s launch of low-cost subsidiary rouge and a focus on international expansion, these long-haul seats were dilutive to unit revenue although still accretive to overall profitability — we expect to see seeing a similar trend at WJA. We believe near-term upside potential is priced into the stock. We were encouraged by 2019 guidance. We estimate that if management can achieve its long-term targets provided in December 2018, the 2022 financial results could potentially support a $37–$42 share price. We expect to see more clarity on the 2022 plan by 2020.

In a research update to clients today, Hammill maintained his “Hold” rating but raised his one-year price target on WestJet from $16.00 to $18.00, implying a return of negative 11 per cent, including dividend.

The analyst thinks WJA will post EBITDAR of $853-million on revenue of $5.17-billion in fiscal 2019. He expects those numbers will improve to EBITDAR of $936-million on a topline of $5.53-billion the following year.