RE:RE:RE:RE:RE:Downgrade for a/c Canada’s airline stocks will “remain limited” until capacity is “adequately adjusted” and the economy improves, said Raymond James analyst Ben Cherniavsky.
In a third-quarter sector preview, he said both WestJet Airlines Ltd.(WJA-T;WJA.A-T) and Air Canada (AC-T) are poised to report “fuel-induced ‘record’ results for the seasonally strong” quarter. Accordingly, he did “tweak” his earnings forecasts for both. However, he expects investors will be focused on revenue per available seat mile (RASM) and “capacity discipline” going forward.
The analyst noted West Jet and Air Canada shares have dropped 10 per cent and 19 per cent, respectively, in the quarter, compared to a 9-per-cent drop for the TSX. The U.S. ARCA airline index (XAL-N) lost 9 per cent, versus a 7-per-cent decline in the S&P 500.
“With the market unwilling to pay-up for the one-time windfall from lower fuel costs, investors continue to send airline managers a strong message that pricing power still matters,” said Mr. Cherniavsky. “Indeed, it is no coincidence, we think, that the aforementioned pressure on airline stocks corresponded to declining RASM trends in the U.S. (where carriers update RASM monthly) and falling load factors in Canada. Nor do we think it is a coincidence that Delta’s stock rallied last week when, along with in-line third quarter 2015 results, the company reported that it will cut 2016 ASM growth to 0 to 2 per cent.”
He added: “Air Canada’s most recent monthly traffic report indicated a full 10.5-per-cent increase in its ASMs for the third quarter of 2015; meanwhile WestJet reported 6.3-per-cent growth in its third quarter ASMs. Notably, the latter was less than the 7.0 to 7.5-per-cent third quarter ASM growth guidance that the company provided in late July, but this was purely related to the delays that WestJet has experienced getting its new 767s certified and off the ground (i.e. this is a deferred, not structural, capacity adjustment).”
Mr. Cherniavsky raised his third-quarter earnings per share estimate to 74 cents from 71 cents with his 2015 estimate going to $2.88 from $2.85. His price target for the stock was unchanged at $26. Consensus is $30.20.
For Air Canada, he raised his third-quarter EPS projection to $2.05 from $1.99. His 2015 full-year EPS went to $3.63 from $3.48. He did lower his price target to $11 from $14, compared to a $17.75 consensus.
He maintained his “market perform” ratings for both.
“In the pending third quarter earnings reports, Air Canada and WestJet are expected to provide guidance on their capacity plans for 2016,” he said. “Our models assume that there will be some moderation of ASM growth next year, but not enough to bring the market into balance (unless the economy surprisingly rebounds). Given the aircraft purchases to which both carriers are committed, the new route announcements that have already been made, and the planned expansion of their respective airlines-within-airlines (Rouge and Encore), we believe it will be difficult for either company to demonstrate serious ‘capacity discipline’ ( la Delta) without compromising their strategic plans and market share ambitions. The show-down continues!”
He added: “Longer-term, we still see compelling growth potential for WestJet as it exploits its cost and balance sheet advantage over Air Canada. Shorter-term, however, we believe Air Canada’s competitive response will continue to suppress both carriers’ results and valuation.”