Westjet still has room to climb

[CanadaEH]

http://www.nationalpost.com/search/story.asp?id=B78CCFF9-728E-4628-9B57-9FAEADDB1BE2

This article was from five days ago, but I thought I'd post it for those who have been bashing Westjet's future stock price.

Airline's shares to hit mid-$30s, Goldman Sachs says

WestJet Airlines Ltd. shares (WJA/TSX), which have enjoyed a 61% runup so far this year, have further room to grow -- to the mid-$30 level -- largely because the airline still trades at a discount compared to other low-cost carriers, says a report from Goldman Sachs.

The Wall Street brokerage house, which initiated coverage this week of the Calgary discounter, describes WestJet as "the most compelling low-cost carrier investment opportunity" -- even though JetBlue Airways Corp. and Southwest Airlines Corp. garner most of the attention in the United States.

"Despite its relatively faster growth and higher returns, WestJet's shares trade at a discount to other global high quality low-cost carriers," write analysts Glenn Engel and Michael Gruetzmacher. "Over time, we expect multiples to converge and we see conservative justification for a mid-$30s stock price."

Moreover, Goldman Sachs expects the carrier to report share profit this year of 85¢, above the Street consensus of 77¢. The bullish estimates are based on WestJet seeing growth in revenue and a decline in unit costs.

Perhaps investors are also anticipating better-than-expected results. WestJet's stock rose $1.14 to finish yesterday's session at $26.02, setting another 52-week high in the process.

The company, which reports third-quarter earnings on Monday, has been one of the few consistently profitable airlines in North America, with its low-cost, discount fare model. This is in stark contrast to arch-rival Air Canada, the traditional full-service carrier, which filed for bankruptcy protection last April.

Currently, WestJet has a market share of roughly 22.7%, compared to Air Canada's 56.4%. But that's a big jump from just two years ago, when its market share was at roughly 9.5% while Air Canada had 71.5%, as consumers search for cheaper ways to fly.

The Calgary airline's stock is trading at a multiple of roughly 41 times earnings over the past 12 months, compared to JetBlue's 64 times and Southwest's 69 times. The Goldman Sachs analysts say the multiples will converge, translating into "meaningful upside" for WestJet.

It foresees a stock price in the mid-$30 range, which would imply a multiple in the mid- to-high-20s based on the coming year's earnings.

"Over time," they write, "we believe a valuation higher than that of Southwest may be warranted, given WestJet's better profitability and growth outlook."

While WestJet is Canada's second-largest carrier, the analysts note its market presence in less-populated western Canada. As WestJet adds more flights in central and eastern Canada -- to new destinations such as Montreal, St. John's, and increased frequency between Toronto and Calgary -- it expects those markets to be a source of robust growth.

Also, WestJet will further reduce costs as it gradually moves from a fleet of Boeing 737-200 to the 737-700, a more cost-efficient plane. And as it operates more long-haul flights, its unit costs will drop as longer flights use less fuel, and incur lower airport charges and maintenance costs per mile flown.

WestJet's unit cost is roughly 12.85¢ based on its average flight of 552 miles, which compares with Air Canada's 17¢, based on 1,225 miles. "We expect Air Canada to emerge from bankruptcy with 10% to 15% lower unit costs -- but still nearly double WestJet's on a stage-length-adjusted basis," the analysts say.

[CanadaEH]

http://www.theglobeandmail.com/servlet/ArticleNews/TPStory/LAC/20031020/RPROF20//?query=Westjet

Also related to Westjet stocks:

Stock in Profile

Nine of the 10 analysts who cover the stock have bullish ratings on WestJet's prospects, with a single "neutral" rating.

The analysts expect Canada's second-largest airline to post a profit of 39 cents a share, according to Reuters Estimates, up from 29 cents last year.

The analysts know that WestJet has a track record of beating expectations.

But many analysts are also paying attention to some potential clouds on WestJet's horizon. These include the rapid growth of Montreal-based Jetsgo Corp. and the possibility that Air Canada will not shrink as much as expected through its restructuring under bankruptcy protection.

On the positive side, they like WestJet because it has always delivered on its aggressive growth plans, because it keeps its costs low and because it is extremely well-capitalized. They point out that even with Air Canada's efforts to cut its annual $3-billion labour bill by $1.1-billion, WestJet will still have lower costs by far.

And in an industry that is increasingly commoditized -- where passengers flock to the lowest fares -- they predict that the dominant low-fare carrier will reap the rewards.

Most of the analysts that cover WestJet have been forced to bite their tongues over the past few weeks because their firms have been involved in a $150-million equity issue.

When the deal closed last week, analysts released a flurry of research reports.

Dlouhy Merchant Group Inc. analyst Cameron Doerksen reiterated his "buy" rating and said he continues to like WestJet's long-term prospects.

He pointed out that with the closing of the $150-million share issue, and a separate $100-million line of credit from the Ontario Teachers Pension Plan, WestJet has "ample financial flexibility" to continue its expansion.

Mr. Doerksen also pointed out that the rising Canadian dollar is good for WestJet, since the airline takes in Canadian dollars but pays for aircraft in U.S. funds.

But Mr. Doerksen lowered his 12-month target on WestJet shares to $27 from $28. The airline's shares closed Friday at $26.05 on the Toronto Stock Exchange.

"Our primary concern with WestJet is that it is priced to perfection and any setback will likely lead to a share price decline," Mr. Doerksen wrote.

WestJet is currently trading at about 30 times consensus estimate for 2003 earnings.

Ben Cherniavsky, an analyst with Raymond James Ltd. in Vancouver, points out that while this appears aggressive, it is discounted relative to the valuations of leading U.S. carriers such as Southwest Airlines Co. (about 45 times) and JetBlue (about 35 times).

Mr. Cherniavsky said he thinks WestJet has done the right things to fill more seats on its aircraft, such as installing personal video screens and giving passengers more legroom.

But he wrote that "considerable risks" remain for WestJet, including what he sees as a glut of capacity in the domestic market.

He said WestJet will benefit if Air Canada scales back its domestic operations as part of its restructuring, or if Jetsgo is eliminated from the market. The risk is that neither could happen.

Mr. Cherniavsky is also wary of persistently high fuel costs and the abundance of surcharges imposed on airline tickets, which are de-stimulative to air travel.

And unlike Mr. Doerksen, Mr. Cherniavsky is concerned about the rising Canadian dollar. He said the strengthening dollar could curtail economic growth, and derail a recovery in air travel.

Earlier last week, Goldman Sachs analyst Michael Gruetzmacher initiated coverage of WestJet with a "buy." He said the airline represents the most compelling investment opportunity among the world's low-cost carriers.

"With greater low-fare stimulation opportunities and an enviable national footprint, WestJet can rapidly expand by stimulating markets with low-fares and stealing market share from Air Canada," Mr. Gruetzmacher wrote.

WestJet currently flies scheduled flights in Canada, with a small portion of charter flights to southern sun destination on behalf of Transat A.T. Inc.

But the airline has repeatedly said it is interested in the U.S. market. Mr. Gruetzmacher said he thinks this represents an attractive opportunity for WestJet to expand the transborder market through low fares. He expects that WestJet will launch transborder service before the end of 2004.

[CanadaEH]

http://www.theglobeandmail.com/servlet/ArticleNews/TPStory/LAC/20031021/RAIRC21//?query=Air+Canada

Air Canada telling staff to withdraw shares

Air Canada is advising its employees to withdraw shares from the company share ownership plan no later than Nov. 15.

The insolvent airline, which has repeatedly warned that its shares will have little or no value when it emerges from bankruptcy protection, said yesterday that, in an effort to reduce costs, it is cancelling the administration of all Air Canada share-based programs.

"Any remaining employee shareholders holding shares with Computershare Trust Co. of Canada will receive a letter over the next week advising them of this decision and asking them to withdraw their shares no later than November 15, 2003," the airline told employees in an internal newsletter.

Stock watchers have been astounded that Air Canada's shares continue to trade at more than $1 each, despite repeated warnings that the stock is virtually worthless.

The shares closed up 2 cents yesterday at $1.24 on the Toronto Stock Exchange.

Air Canada spokeswoman Renée Smith-Valade said the Nov. 15 date is unrelated to the timing of Air Canada's plans to cancel or water down its current shares.

"It was just determined to be a reasonable time frame under which notice could be given to employees who were still holding shares to divest of them."

She said the stock ownership plan is being cancelled as part of Air Canada's drive to lower costs.

Air Canada is planning to pay $8-billion to $10-billion in debt by issuing new shares.

The airline is also in discussions with two potential investors -- Hong Kong businessman Victor Li and New York-based Cerberus Capital Management LP -- about investing $700-million for new equity.

"The proposals contemplate that shareholders of the company will receive minimal, if any, consideration for their shares," Air Canada said last month in a press release.

Air Canada has said that it may cancel its existing shares when the new ones are issued.

Alternatively, they will become so watered down as to become virtually worthless.

In a restructuring under bankruptcy protection, existing shareholders are not entitled to any recovery unless the company's creditors get their debts repaid in full. Air Canada's creditors are expected to see their debts paid off at a fraction of face value.

Pundits have long been amazed that investors keep paying money for Air Canada shares.