WestJet Airlines Ltd.'s expected solid quarterly profit isn't the only thing company watchers will be looking for Tuesday.
In fact, a good earnings report is only part of the picture, analysts say. It's the market's reaction that they will be watching closely, along with numerous factors outside WestJet's control, from heightening competition in the Canadian skies to limp economic numbers.
In short, analysts are optimistic about the company. They're less optimistic about the environment surrounding WestJet and its stock price.
"We still believe in the story, unfortunately, so does the market," analyst Jacques Kavafian of Toll Cross Securities said in a recent report. "Much of the good news already reflects in the share price."
WestJet's share price has soared in a year's time to about $25 from $14.50. At a time when many other industries are fluctuating with the economic winds, WestJet, along with Air Canada, has been reporting full planes and signs of strong demand for the summer travel season. And the introduction of premium economy-class options is only expected to add new revenue streams.
Still, analysts wonder whether the market isn't getting ahead of itself. Mr. Kavafian forecasts WestJet first-quarter profit, to be released Tuesday morning before the company's annual general meeting, to come in at 67 cents a share, compared with 49 cents in the same period a year ago. The general consensus among analysts is 64 cents a share unadjusted profit.
Mr. Kavafian recommends taking a more cautious "hold" position on the stock, given potential softening in the second quarter. Others have also been reducing their recommendation, advising investors to sell a little of the stock to take advantage of its current level.
"While we continue to believe that the airline industry is going through a positive secular transformation, we do not expect share price appreciation to be linear. Accordingly, we see a pause in share prices at current levels, and we recommend that investors take profits," Walter Spracklin of RBC Dominion Securities said in a recent research note.
He points to the introduction WestJet's regional carrier Encore, adding seats that need to be filled at the same time that Air Canada is also introducing its Rouge discount carrier. Meanwhile, Porter Airlines is also trying to add new flights in the coming years from Toronto, even though regulatory approval is far from certain.
It's all an indication of how competition is heating up, adding to company watchers' concern about current stock levels. "Even when Porter's news took this threat one step closer to a reality, the stocks of the incumbent carriers barely skipped a beat," analysts at Raymond James cautioned.