Is WestJet Airlines Ltd. a Buy After its 5% Earnings-Induced Decline?

WestJet Airlines Ltd. (TSX:WJA) released first-quarter earnings results on May 3, and its stock has reacted by falling over 5%. Should you buy on the dip?

The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

WestJet Airlines Ltd. (TSX:WJA), the second-largest airline company in Canada, announced its first-quarter earnings results before the market opened on May 3, and its stock responded by falling over 5% in the day’s trading session. Let’s break down the results and the fundamentals of its stock to determine if we should use this weakness as a long-term buying opportunity or a warning sign to avoid it for the time being.

A weak quarter of year-over-year declines

Here’s a summary of WestJet’s first-quarter earnings results compared with what analysts had expected and its results in the same period a year ago.

Metric Q1 2016 Actual Q1 2016 Expected Q1 2015 Actual
Diluted Earnings Per Share $0.71 $0.65 $1.09
Revenue $1.03 billion $1.03 billion $1.08 billion

Source: Financial Times

WestJet’s diluted earnings per share decreased 34.9% and its revenue decreased 4.8% compared with the first quarter of fiscal 2015. It noted that these less-than-stellar results could be attributed to the impact of economic weakness in Alberta, which has been an ongoing issue for the company, but it went on to state that the fundamentals of its business remain strong, and that it’s seeing positive trends from the adjustments it made to its schedules and the strategic initiatives it has continued to undertake.

Here’s a quick breakdown of 10 other notable statistics from the report compared with the year-ago period:

  1. Net earnings decreased 37.7% to $87.6 million
  2. Segment guests increased 8.4% to 5.33 million
  3. Guest revenues decreased 7.4% to $886.2 million
  4. Ancillary revenues increased 14.8% to $95.4 million
  5. Other revenues, which includes ancillary revenues, increased 14.8% to $145.2 million
  6. Revenue per revenue passenger mile (yield) decreased 11.6% to 17.22 cents
  7. Earnings from operations decreased 37.5% to $123.3 million
  8. Operating margin contracted 620 basis points to 12%
  9. Cash provided by operating activities decreased 13.9% to $222.1 million
  10. Repurchased 800,000 shares for a total cost of approximately $14 million

WestJet also announced that it would be maintaining its dividend of $0.14 per share in the second quarter, and it will be paid out on June 30 to shareholders of record at the close of business on June 15.

Should you buy WestJet on the dip?

The first quarter was very weak for WestJet, so I think the post-earnings drop in its stock is warranted. However, I also think the drop represents a great buying opportunity for the long term for three reasons.

First, it’s undervalued. WestJet’s stock now trades at just 8.6 times fiscal 2016’s estimated earnings per share of $2.38 and only 8.2 times fiscal 2017’s estimated earnings per share of $2.47, both of which are major discounts compared with its five-year average price-to-earnings multiple of 11.8 and the industry average multiple of 11.7.

Second, it has been actively repurchasing its shares. WestJet repurchased 1.44 million shares in fiscal 2014, 4.72 million shares in fiscal 2015, and 800,000 shares in the first quarter of fiscal 2016, and there are two million shares remaining for repurchase under its 2015 normal course issuer bid (NCIB), which expires on May 12. In its earnings report, the company also stated that it intends to submit an application for a new NCIB to repurchase up to four million shares as soon as its 2015 NCIB expires.

Third, it has a good dividend. WestJet pays an annual dividend of $0.56 per share, which gives its stock a yield of about 2.75% at today’s levels. It is also very important to note that the company has raised its annual dividend payment every year since it began paying one in 2010, resulting in five consecutive years of increases, and I think its ample cash provided by operating activities will allow its streak to continue by announcing a slight increase before the end of 2016.

WestJet’s ongoing share repurchases and its streak of annual dividend increases show that it’s fully dedicated to maximizing shareholder value.

With all of the information provided above in mind, I think Foolish investors should strongly consider using the post-earnings weakness in WestJet Airlines to begin scaling in to long-term positions.

Just Released! 5 Stocks Under $50 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $50 a share.

Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.

Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joseph Solitro has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Investing

analyze data
Dividend Stocks

Market Correction Opportunity: 2 Canadian Dividend Stocks for TFSA Income

These stocks pay attractive yields today for income investors

Read more »

oil pump jack under night sky
Dividend Stocks

Here’s How Many Shares of TRP Stock to Own for $5,000 in Dividends, Even if Energy Prices Swing

Want major income, even if energy prices fluctuate, this could be a strong investment.

Read more »

A meter measures energy use.
Dividend Stocks

Here’s How to Earn $500/Month From Fortis Stock, Even With an Interest Rate Freeze

Fortis stock is a strong investment and can continue to be one even with interest rates remaining high.

Read more »

Person slides down a stair handrail
Stock Market

Beyond Steel and Aluminum: Unveiling the Hidden Tariff Casualties in Canada

While aluminum and steel tariffs grab headlines, Canadian investors overlook these real tariff victims: apparel, transport, and telecom stocks bleeding…

Read more »

Dividend Stocks

Real Estate Exposure Without Property Ownership: 3 Canadian REITs Worth Considering

These top Canadian REITs are trading off their highs and offer compelling dividend yields, making them three of the best…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Investing

Poilievre Proposes a $5,000 TFSA Top-Off: 2 TSX Stars to Watch

I'd buy Alimentation Couche-Tard (TSX:ATD) and another top stock if I had an extra $5,000 in TFSA funds.

Read more »

Pile of Canadian dollar bills in various denominations
Investing

Tiny but Mighty, These TSX Small-Caps Have Major Growth Potential

These small-cap stocks have strong fundamentals and promising growth prospects. Moreover, they are trading cheap.

Read more »

An investor uses a tablet
Dividend Stocks

Tariff Trade War: A Few Solid Stocks to Buy Now

These stocks have reliable operations, offer attractive dividends and are trading off their highs, making them three of the best…

Read more »