Sunday, June 11, 2017

Analysis of WestJet

         Is it often said one of the worse types of companies to invest in are the airline stocks.  In fact, Richard Branson once said "The quickest way to become a millionaire is to be a billionaire and start an airline".  The airlines as an investment has garnered a lot of attention recently as in the past year Berkshire Hathaway has invested heavily in airlines in the United States. Berkshire Hathaway is the holding company which is ran by Warren Buffett and Charlie Munger.

        In Canada, currently we have 4 airlines which are Air Transat, Porter Airlines, WestJet Airlines, and the Air Canada.  I am going to talk about WestJet Airlines in this article.

        WestJet Airlines (ticker symbol WJA.TO) was started in 1996 by Clive Beddoe and a team of partners with just 3 planes.  WJA.TO is headquartered in Calgary, Alberta, Canada.  The company has grown tremendously since its inception. Often people who work for airlines belong to a union, but this has not been the case for WestJet as most of their workers own shares in the company.

        When people decide to take a trip, they often go on the websites of airlines or to travel agencies to look for a deal.  This makes it harder for the airlines to be profitable and remain profitable over time. Why would some one choose a specific airline over another one if they can save money?  If the savings is not significant, the traveller will choose the airline in which they find the service better.  WestJet believes just because fares are cheaper does not mean poor quality service.

         Personally, I have travelled on both WestJet Airlines and Air Canada, and the service was the same. My very first time on a plane was with WestJet in 2003.  I flight was from Moncton, New Brunswick to Grande Prairie, Alberta and I had to change planes for the final leg of the trip in Edmonton, Alberta.  The last leg of the trip was the airplane get circling the airport and it was late at night.  The lights on the runaway in Grande Prairie were not working, so we went back to Edmonton and were put up in a hotel.  I basically told them, I absolutely refuse to share a room as I do not know anyone. I was allowed to stay in a room with 2 beds by myself without a hassel.

       When deciding on an investment, we have to do research such as pouring over annual reports doing a quantitative analysis and then doing a qualitative analysis.  Quantitative analysis is pouring over the numbers.  Investors can get information from annual reports or from online sites such as google finance or Morningstar.

         WestJet revenues have grown revenues from 2.151 billion in 2006 to 4.123 billion in 2016.  This represents a compound annual growth rate, CAGR, of  7.50%

        This CAGR for revenue of 7.50% for an airline is quite impressive. Over the 10 year period, WestJet has added routes to more destinations and increased frequency of some routes when the time is warranted.   The company has aggressively repurchased shares over this time.  In 2010, WestJet actually issued more shares but have aggressively bought back shares afterwards. Over the 10 year span, the amount of shares outstanding have declined by around 8%.

        WestJet earnings per share have grown from $1.47 in 2007 to $2.45 in 2016.  This represents CAGR of  5.84%. 

        With a bottom-line growth of almost 6 percent for this airline is quite impressive and even more impressive that this includes the great financial recession of 2008-2009 and the fact Alberta is in a recession for the past 3 years due to lower oil prices.
        WestJet did not pay a dividend until 2010 and actually the first dividend payment date was January of 2011.  The dividend has grown from $0.20 per share per year to $0.56 per year in 2016.  This represents of CAGR of 18.72% over last 6  years.  A dividend growth rate of 18.72% is impressive for any company and even more impressive for an airline.  The dividend payout ratio for 2016 is 22.4%, so the company has room to grow the dividend in the future.

    Let's turn to the balance sheet.  The long term debt to equity ratio is 0.92. The interest coverage ratio is  9.48.

Currently, WestJet is trading at a P/E ratio of 10.7.  That is well below the broader market. This is also below the stock's own 5 year average of 11.4.  Investors are paying less for WestJet's cash flow than, over average, over the last 3 years.  The current dividend yield of 2.4% for the stock is higher than it's 5 year average of 1.5%.


Now we will at the valuation. For a valuation we will use dividend discounted model. I used a dividend growth rate of 12% for the next 5 years then leveling off after that to a 7% growth rate after that. I am using a dividend discount rate of 10%.  With these numbers I have come $24.81

According to Questrade's Market Intelligence, they have Morningstar fair value at $25.00.

If we take a average of these numbers, we get a price of $24.90.

Right now, WestJet is at $22.93 as of Friday's close.  So the company appears to be approximately 9% undervalued.


As only 2 numbers were used to get an approximation of the average price the stock is worth, I would take this with a grain of salt. The low price of a barrel of crude right now lowers the operating expenses of this company. So for a larger margin of safety, I would not be a buyer at these levels.

Also I do believe WestJet has some headwinds in the future with increase competition and possibility of lower load factors for a couple of years with people tightening their purse strings in fear of recession across North America.

Disclosure:    Currently do not own any shares of WJA.TO in any accounts.

I am not a financial planner, financial advisor, accountant or tax attorney. The information on this blog represents my own thoughts and opinions and should NOT be taken as investment or business advice.

Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.


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