Air Canada has been a surprising star on the stock market over the past 21 months, but the momentum is starting to shift in WestJet Airlines Ltd. (WJA-T14.10-0.04-0.28%)’s favour.
WestJet shares climbed a mere 14 per cent last year while Air Canada (AC.A-T3.12-0.16-4.88%) stock soared 161 per cent. Now, several analysts are examining whether it’s time to switch investing strategies and back WestJet.
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WestJet Airlines (WJA-T)
14.10 -0.04 -0.28%
As of Jan 19, 2011 4:00
Range:1 Day 5 Day 1 Year View Larger Chart Add to Watchlist
Air Canada (AC.A-T)
3.12 -0.16 -4.88%
As of Jan 19, 2011 3:59
Range:1 Day 5 Day 1 Year View Larger Chart Add to Watchlist
UBS Securities Canada Inc. analyst Tasneem Azim said the window of opportunity appears to be closing for huge investment gains on Air Canada, whose shares declined 13 cents to $3.13 on Wednesday.
Timing, of course, is everything when it comes to investing in airline shares. From its IPO price of $21 in late 2006, Air Canada got beaten down to a penny stock in the spring of 2009, when it traded as low as 73 cents. Air Canada shares finally staged a prolonged rally after management secured labour and pension deals with unions in the summer of 2009.
But the Canadian Auto Workers union, which represents airport customer service agents and call centre staff, has a collective agreement that will expire on Feb. 28. Four other Canadian union contracts will expire March 31.
“We believe labour contract negotiations could lead to a material increase in wage and pension expense over the next few years for Air Canada,” Ms. Azim said in a research note.
She raised her 52-week price target on WestJet to $18 from $17, while reducing her target for Air Canada to $4.50 from $5. Ms. Azim maintained “buy” ratings on both carriers, but believes that WestJet will be able to better withstand the sting of rising fuel expenses.
Ms. Azim said WestJet enjoys a 30-per-cent cost advantage over Air Canada, mostly as a result of the smaller carrier having lower expenses “due to a non-union work force and single-aircraft fleet,” which keeps maintenance bills for Boeing 737s under control.
Despite the cost advantage, Calgary-based WestJet has encountered its own turbulence over the years. Its initial public offering went out at a split-adjusted $2.96 a share in July, 1999. While the carrier’s stock climbed steadily for nearly five years, its price trajectory has been choppy since mid-2004.
“WestJet’s stock has been dead money” for several years, Raymond James Ltd. analyst Ben Cherniavsky said in a research note this week. The shares fell 4 cents to $14.10 on Wednesday, or roughly the same level they were at almost six years ago.
CIBC World Markets Inc. analyst Jacob Bout raised his price target on WestJet to $17 from $16, noting that the airline is “starting to reap early benefits from its new reservation system as it seeks partnership agreements” with foreign carriers. Mr. Bout maintained his $5.50 target for Air Canada, but cautioned that “any major labour disruption would derail Air Canada’s positive momentum, especially during the busy summer period.”
Mr. Cherniavsky raised his price target for WestJet to $16.50 from $13.75, while keeping his target for Air Canada at $6.50. Still, he said he continues to view Air Canada as “the preferred way to capitalize on the airline up-cycle in Canada.” He maintained an “outperform” recommendation for Air Canada, while upgrading WestJet to “outperform” from “market perform.”
Air Canada doesn’t pay any dividends, but WestJet will distribute its inaugural quarterly dividend of 5 cents a share
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