WestJet update

Reviewing your companies is extremely important. When your are like me and have many undervalued companies (at least I think so), you have to keep tabs on all of them. This doesn’t mean you should sell when they miss a quarter, but it is important to monitor the businesses through their various cycles.

Well WestJet didn’t miss their quarter, but I still think there are some things I think I should point out.

WJA is running like a well oiled machine. Imagine an airline that didn’t lose a ton of money during the recession, in fact WJA earned a profit every quarter.

  • WJA has generated cash currently of $8.58 per share and net cash of $0.85. This is a company that generates cash every quarter (if you smooth out lumpy capex).
  • They now have an interline agreement with American airlines. This may lead to a code share agreement in the future, which is possible in the next couple of years.
  • WJA has now been authorized to buy back 5% of its shares. This is good news, but the diluted share count can still grow from the employee profit-sharing agreement.
  • WJA has introduced a new bag fee when checking a second bag, of $20. This shows WJA ability to pass on costs, and should add $8-10 million in revenue.
  • WJA is going to pay a dividend of $0.05/share each quarter. This gives WJA a yield of 1.5%.
  • Capacity growth is more muted than in previous quarters.

WestJet and Air Canada operate a duopoly here in Canada. WJA has the advantage and knows it, this is very important. I’m not an expert on game theory, but I’m sure someone will write a book on the these two airlines and the strategic moves they make. WestJet announced a new bag fee, this is actually bigger news than it seems. In the past WJA has been more reactive, but this shows that WJA has the opportunity to raise prices and knows it.

The rapid expansion is over, and all the very low hanging fruit has been picked. WJA can still pick up market share, but it will be more muted. The airline has the lowest cost advantage, and has made the right moves to please shareholders. It is refreshing to see them allocate the excess cash on the balance sheet to me and my fellow shareholders.

I still think that WJA is worth (at minimum) $20/share. The fair value didn’t change, but I have more confidence in my previous assumptions. I think WJA around $11.25 is worth buying.

Dean

The author is long WJA at time of writing.

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