Sell your WestJet stock, this fund manager says

Shareholders of WestJet ( WestJet Stock Quote, Chart, News TSX:WJA) were handsomely rewarded back in May when the deal was announced that could see Onex Corp pick up Canada’s #2 airline for $5 billion.

But is there any value to holding onto the stock now that the share price has shot up close to the deal’s $31 per share asking price?

Not at all, says John O’Connell of Davis Rea Investment Counsel, who advises that the risk/reward is unfavourable.

It’s been a busy year for both Canada’s airlines and for the regulatory bodies tasked with poring over the nuts and bolts of two major still-pending transactions.

First up was Air Canada, which surprised earlier this year with a plan to buy Transat AT Inc, whose Air Transat holiday airline stands as Canada’s third-largest carrier, for now roughly $720 million or $18 per share. That deal was approved by Transat shareholders in August but will likely have to wait until next spring to get a decision from Transport Canada on whether it’s in the public interest to shrink competition among Canadian carriers.

Next was the May bombshell that private equity firm Onex had put in a friendly offer to buy WestJet and take it private. And along with the regulatory approvals — of which the deal has already received approval by an Alberta court in September — the acquisition is facing another potential hurdle in the form of a challenge by Air Canada on the grounds of foreign ownership.

But while WJA shareholders have made out well when the stock jumped from $18 to $30 overnight in May, the chance for further upside to its current price of $30.63 is not worth the gamble, says O’Connell, who spoke to BNN Bloomberg on Friday.

WestJet stock has regulatory risk…

“It’s under review by the government to see whether the takeover is going to take place, so you’re into a realm of dealing with regulatory uncertainty, and if you bought the stock before the takeover was announced, unless you are really in tune with what is likely to unfold I wouldn’t own the stock any longer,” says O’Connell, chairman and CEO of Davis Rea.

“You’re being paid a fair price. If you’re going to hold out for whatever the discount is to the takeover price — I’m going to assume it’s around eight per cent or so — I would be nervous that you might make eight per cent more or whatever the discount is but you could lose a lot, and so that risk/reward doesn’t work for me,” he says.

WestJet’s share price had been struggling before the Onex deal was announced, as the airline worked to extend its international reach in the business class space with its Dreamliner aircraft, all the while facing higher fuel costs, labour issues and the global grounding of Boeing Max 737 planes, which commenced earlier this year.

But the company’s fortunes have taken a better turn more recently, as witnessed by WestJet’s latest quarterly report delivered in October, which showed its third-highest overall quarterly profit ever at $119.4 million.

“We are very pleased with these remarkable results, achieving our highest ever third quarter load factor, second-highest ever third quarter net earnings and the third-highest quarterly net earnings in WestJet’s history,” said Ed Sims, WestJet president and CEO.