WestJet Airlines Ltd. (TSX:WJA), Canada’s second-largest airline company, reported record third-quarter earnings results Tuesday morning, but its stock responded by falling about 0.5% in the day’s trading session. Let’s break down the results and the fundamentals of its stock to determine if we should be long-term buyers today.
Increased passenger traffic leads to record earnings
Here’s a summary of 12 of the most notable financial statistics from WestJet’s three-month period ended September 30, 2017, compared with the same period in 2016:
|Metric||Q3 2017||Q3 2016||Change|
|Guest revenues||$1,047.81 million||$988.33 million||6.0%|
|Other revenues||$167.78 million||$136.01 million||23.4%|
|Total revenues||$1,215.59 million||$1,124.34 million||8.1%|
|Earnings from operations||$201.85 million||$170.13 million||18.6%|
|Operating margin||16.6%||15.1%||150 basis points|
|Earnings before income taxes||$194.36 million||$162.56 million||19.6%|
|Net earnings||$138.43 million||$115.97 million||19.4%|
|Net earnings per diluted share (EPS)||$1.18||$0.97||21.6%|
|Operating cash flow||$369.73 million||$277.04 million||33.5%|
|Free cash flow||$151.49 million||$126.45 million||19.8%|
|Load factor||85.7%||84.0%||170 basis points|
What should you do now?
It was a fantastic quarter overall for WestJet, which included quarterly records for both net earnings and load factor, and its earnings beat the consensus estimate of analysts polled by Thomson Reuters, which called for $1.14 per share. That being said, I think the market should have responded by sending WestJet’s stock higher in Tuesday’s trading session, and I think it represents a great investment opportunity for the long term for two fundamental reasons.
First, it trades at attractive valuations. WestJet’s stock is up about 17% year to date, but it trades at just 10.9 times fiscal 2017’s estimated EPS of $2.47 and only 9.2 times fiscal 2018’s estimated EPS of $2.93, both of which are inexpensive compared with its five-year average multiple of 11.1; these multiples are also inexpensive given its estimated 10.1% long-term earnings-growth rate.
Second, it has a great dividend with room for growth. WestJet currently pays a quarterly dividend of $0.14 per share, equating to $0.56 per share on an annualized basis, which gives it a respectable 2.1% yield. Investors must also note that the airline company has raised its dividend five times since 2010, and I think its very strong growth of operating cash flow, including its 29.9% year-over-year increase to a diluted $6.90 per share in the first nine months of 2017, could allow it to announce another hike at some point in 2018.
With all of the information provided above in mind, I think WestJet Airlines represents a great long-term investment opportunity, but I must add that I prefer Air Canada today.