Should Investors Buy WestJet Airlines Ltd.?

Because of low fuel prices and an increase in revenue generated per customer, WestJet Airlines Ltd. (TSX:WJA) has been able to grow profits, making this stock a smart buy for investors.

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Airline stocks, especially those in Canada, can be a little difficult to stomach on the surface because they appear to be at odds. The economy is so reliant on high oil prices, but that means that jet fuel is expensive, making it more expensive to fly. On the other hand, if oil prices are down, people are losing jobs, so they can’t fly either.

Despite this perceived weakness, I believe that buying WestJet Airlines Ltd. (TSX:WJA) is actually a really smart move for investors. While there are many airlines that are awful investments, I believe WestJet is definitely worth considering.

One of the primary reasons for this is because it is smashing expectations for quarterly results. Its third-quarter net profit was $101.8 million, beating last year’s third-quarter profit of $55.2 million. Its operating profit was $159.5 million, which was 26.8% better year over year on $1.05 billion in revenue.

The primary driver of that increase? Jet fuel prices have dropped significantly. According to WestJet, the company paid $206.9 million in fuel costs in the third quarter, which was a 27.9% drop over the previous quarter. That’s a lot of money to save and is likely what contributed to the increase in profits.

But WestJet is not just looking to save money on fuel charges. Following the trend in airlines, WestJet announced a series of new initiatives it hopes will increase revenue. Firstly, it will be increasing the number of seat upgrades on airlines. Secondly, the first bag for international economy passengers won’t be free. The CEO of the company expects that this will result in $25 million in new revenue.

Another trend that WestJet has been pushing toward is increasing revenue from guests once they are on the plane. A few years ago WestJet only generated an additional $6 per guest from non-direct flight sources. That has since grown to $16 and is far less shocking to a passenger than increasing fares and other sorts of fees.

All of this contributes to the company’s ability to return adequate money to investors. This is done in two ways. The first is through an aggressive share-repurchasing program. In 2014 WestJet bought $39.43 million shares of common stock. It has already spent $119.8 million buying shares back and has until May 12, 2016 to buy an additional one million shares, which it expects to do to keep up with its plans. The second way is with its $0.56/year dividend, which, at current prices, has a 2.75% yield.

Fundamentally, WestJet is doing very well. For 42 consecutive quarters, the company has been able to post results in the black, allowing it to continue its strategy of growth. It has one of the newest fleets in the air, and it intends to expand in the Trans-Atlantic market, which will allow it to target business customers. All told, I believe investors would be incredibly wise to consider picking up shares of this undervalued stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jacob Donnelly has no position in any stocks mentioned.

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