WestJet: Canadian Airline Flies High

06/29/2015 7:00 am EST


Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

With headquarters in Calgary, Alberta, this value investing recommendation is one of the leading airlines in Canada, suggests J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.

WestJet (TSX: WJA) (OTC: WJAVF) flies 113 Boeing 737s and Bombardier Q400s, and at 6.8 years, its fleet is one of the youngest in the business.

Its low-fare approach has enabled the company to expand rapidly during the past five years.

WestJet and its 10,000 employees now serve 90 destinations in North America, Central America, the Caribbean, and Europe.

WestJet continues to add new routes to its system and new aircraft to its fleet. Revenues increased 6% and EPS climbed 28% during the 12 months ended March 31, 2015. Lower fuel prices provided a big boost to earnings.

The company prides itself on its outstanding service to passengers after becoming a J.D. Power Customer Service Champion (one of two companies in Canada), ranking third in Aon Hewitt’s best employers in Canada, and chosen as Canada’s most preferred airline in 2014.

I expect revenues to rise 8% and EPS to surge 20% to $3.25 (Canadian) during the next 12-month period. Earnings could exceed my forecast if oil prices remain low, although the weakening Canadian dollar could offset part of the gain.

At 9.9 times current EPS and with a dividend yield of 2.1%, WJA shares are clearly undervalued. The quarterly dividend was recently raised to $0.14 from $0.12 CAD, which reflects the board of directors’ positive outlook for the company.

I expect WJA shares to reach my minimum sell price target of $34.65 CAD within one year.

I expect the US-listed WJAVF shares to reach $27.72 USD within one year also. WJAVF shares are thinly traded so caution is advised. Buy at the current price.

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