WestJet Airlines Ltd. (TSX:WJA) is a low-cost alternative carrier to Canada’s major airlines. The company provides charter air service to around 100 destinations in Canada, the U.S., Europe, Mexico, Central America and the Caribbean. The company has been able to keep costs approximately 25% lower per mile flown than its peer Air Canada (TSX:AC)(TSX:AC.B). The stock of WestJet has taken a huge hit over the past few years and is now down 34% from its 2014 high. WestJet definitely looks dirt cheap right now, and value investors have been pondering whether or not they should add the airline to their portfolio. Warren Buffett is bullish on airlines, should you be too?
The Canadian airlines may be ripe for an upwards move over the medium-term thanks to a cyclical upswing in the airline sector. The company is riding a huge amount of momentum that is likely to continue this year. WestJet flew a record 22 million passengers in 2016, and there’s reason to believe that the amount of passengers flown for this year may be even higher. The American economy is expected to be strengthened under the Trump administration, and as a result, the Canadian airlines are set to benefit from our neighbors south of the border.
When combined with the fact that the company is striving to increase operational efficiency, I think WestJet could fly a lot higher from current levels. The management team is looking into purchasing “more fuel-efficient” jets for its oversea flight expansion. It’ll cost a considerable amount of money now, but I believe it’s an investment that will provide huge value in form of lower costs over the long haul.
WestJet is so cheap that it looks too good to be true. The stock currently has a 9.2 price-to-earnings, 1.3 price-to-book, 0.7 price-to-sales, and a 3.9 price-to-cash flow. All of which are lower than the company’s five-year historical average multiples of 11.4, 1.8, 0.8, and 4.9 respectively. The dividend yield is also considerably higher at 2.5% than its five-year average of 1.9%.
I think WestJet is a terrific medium-term trade for an investor looking for capital gains. The strong momentum is likely to continue and you’re likely to see a nice amount of gains over the course of a year or so. The stock is really cheap, but keep in mind that WestJet, as well as any airline stock is extremely cyclical. This means that the stock will inevitably come crashing down in a cyclical downswing, so make sure you take profits off the table down the road, as airlines are not great long-term investments that you can simply buy and forget about for decades.
