BMO downgrades WestJet as risks rise

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WestJet Airlines Ltd. this week reported significantly higher quarterly profit that beat analysts' estimates, raised its dividend, announced a cost-cutting program, and applied to buy back up to 5 per cent of its shares.

So what's not to like?

BMO Nesbitt Burns analyst Fadi Chamoun has some ideas. He downgraded the stock today to "market perform" from "outperform," worried that the airline's plans to increase passenger capacity elevate risks that earnings will disappoint in the future. This, combined with the increase in the stock's valuation over the past year, "renders the risk/reward neutral," he argues.

WestJet management said this week it expects its system capacity to grow between 7.5 per cent and 8.5 per cent in fiscal 2013 from the previous year – about 50 basis points higher than previous guidance. Capacity for domestic-only flights is expected to grow between 5 per cent and 6 per cent, as the company starts up its new regional service Encore this summer.

Despite his more cautious stance, Mr. Chamoun still thinks WestJet makes for a solid investment in the long run. "We maintain a positive outlook on WestJet's long-term prospects and believe that management continues to execute extremely well," he said in a research note. "The targeted $100-million of cost reductions over the next three years is an indication that the company is not getting complacent about maintaining its key competitive advantage (lowest costs operator)."

Upside: Mr. Chamoun maintained a $24 price target.

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The Chinese Ministry of Commerce this week initiated an anti-dumping probe into cellulose pulp imported from the United States, Canada, and Brazil. Raymond James analyst Daryl Swetlishoff believes that the impact on Fortress Paper Ltd. could be material – although he stressed details of the Chinese action are scarce at this point.

"To the extent this trade action has the potential to result in some type of trade remedy (e.g., tariffs or quotas) being applied to Canadian dissolving pulp exports to China, FTP's cost structure could rise – potentially reducing the 'cost curve' protection and impacting future margins," said Mr. Swetlishoff.

Upside: Mr. Swetlishoff slashed his price target to $11 from $16, and reiterated a "market perform" rating.

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Gildan Activewear Inc. reported better-than-expected earnings and revenue in its latest quarter, but the company maintained its fiscal 2013 earnings per share guidance of $2.60 to $2.70.

Some analysts believe the clothing manufacturer is just being conservative in its outlook. "We believe there is a strong probability for upward guidance revisions as the year progresses, should cotton prices remain range-bound, and should Gildan secure additional retail wins and wholesale market share," commented Canaccord Genuity analyst Derek Dley.

Upside: Mr. Dley reiterated a "buy" rating and raised his target by $1 to $42 (U.S.).

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Russia's potash export agency signed a contract with India this week that came sooner than expected and at better-than-forecast prices, noted Paradigm Capital analyst Spencer Churchill. The deal signals that Canpotex, the Canadian potash marketing agency, could sign its own deal within days.

"India finally signing a new potash contract was a key catalyst we had been waiting for, and assuming Canpotex follows with its own deal shortly, we believe the news is very positive for Potash Corp.," Mr. Churchill said in a research note. "India and China were the primary culprits behind a disappointing year for potash shipments in 2012, and at a combined 15 million tonnes of consumption (or 25 per cent of the market) their re-entrance should aid significantly in what is expected be a strong rebound in 2013."

Upside: Mr. Churchill reiterated his "buy" rating and $61 (U.S.) price target.

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Green Mountain Coffee Roasters Inc. should see several years of strong revenue and earnings growth, driven by rising penetration of Keurig single-cup coffee makers in North American households, said Canaccord Genuity analyst Scott Van Winkle.

The company reported better-than-expected earnings this week and Mr. Van Winkle sees more gains in the stock ahead as margins improve and cash flow rises.

Upside: Mr. Van Winkle raised his price target to $54 from $45 and maintained a "buy" rating.