WestJet Airlines (WJAFF, Buy)’ operations are running on the strategy that trusted staffs provide high quality of service to customers and contented passengers will lead shareholder returns. The company posted net profit of C$51.8 million (40 Canadian cents per share) in second quarter beating the consensus estimate of $0.28 by $0.12. Canadian airline flies high with thirty seventh consecutive profitable quarter.
In second quarter, sales increased by 10.3 percent as traffic grew by 5.5 percent. Earnings growth at 4.6 percent was strong and remained assertive since last three quarters, with likely forthcoming easy quarter. Net income was increased by 16 percent, while earnings of CAD 0.40 per share grew by 20 percent due to 3.5 percent decrease in shares outstanding. With opening of fare classes in 2013, ancillary sales increased by 25% year-over-year. Load factor increased 20 bps to 79.6 percent from previous year. Cost per available seat mile (CASM) increased 4.2 percent led by fuel, maintenance and marketing expenses. Yet, CASM (excl. fuel) increased just 2.4 percent which allows operating margins to increase 50 bps to 8.4 percent.
Capacity is expected to rise by 6 percent to 7 percent as a result of 10 new aircraft increment in FY14 and additional consumption of current aircraft. In our view, earnings will increase by 3 percent for full-year 2014 (compare to 0.4 percent drop previous year), due to stiff capacity and better demand throughout industry, which should let sales to jump 7 percent. Due to ongoing instability in the CAD and increasing operational expenses, CASM is likely to increase by 1.5 percent to 2.0 percent (against 2.0 percent to 2.5 percent), post reduction in continuing costs by CAD 125 million in FY14. Additionally, company will repurchase at least 2 million shares.
As per management guidance, company will announce $2.02 EPS for the 2014 fiscal year. We are increasing target price on shares from C$33.25 to C$34, seeing possible upside of 19.34 percent from current price. WestJet is trading at $26.12, 14 times our 2014 EPS estimate.