Alaska Air Holds Growth Trajectory

8/3/2015


  Recent Price
$75
  Dividend
$0.80
  Yield
1.1%
  P/E Ratio
14
  Shares (millions)
130
  Long-Term Debt As % Of Capital
23%
  52-Week Price Range
$77.80 - $40.69

After ascending for much of the year, Alaska Air Group ($75; ALK) shares have been jostled by a bit of turbulence following a solid June-quarter report. The airline's per-share profits surged 56% to $1.76 excluding special items, topping the consensus by $0.03. Revenue increased 5% to $1.44 billion, marking the 23rd consecutive quarter of growth, to match the consensus. Traffic rose 9%.

Alaska Air's operating profit margin, now up in seven straight quarters, currently stands at its highest level since at least 1979. The company owes much of its improved profitability to lower fuel costs, down 34% to $2.12 per gallon in the June quarter. But Alaska Air showed discipline elsewhere, as operating costs per available seat mile excluding fuel declined 4%.

The stock has dipped 1% since the earnings report. But Alaska Air shares have produced a 25% total return in 2015, versus an average loss of 3% for S&P 1500 airline stocks. The shares still seem reasonably valued, with a Quadrix Value score of 70. Alaska Air, yielding 1.1%, is a Focus List Buy and a Long-Term Buy.

Alaska Air stands by conservative strategy

Investors have been acutely sensitive to the risk of airlines expanding capacity at a faster rate than the market can bear, a move that can send the industry into a tailspin of pricing wars. Alaska Air's capacity gains appear fairly conservative and are poised to decelerate. Its June-quarter capacity growth of 11% exceeds its 10% growth target for 2015 and its high-single digit target for 2016.

Rival Delta Air Lines' ($44; DAL) June-quarter capacity jumped 35% at Seattle-Tacoma International Airport, essentially Alaska Air's backyard. Competition from Delta has yet to put a big dent in the operating results for Alaska Air, which has gradually broadened its geographic exposure over the past six years. In that time it has increased its presence in Hawaii (18% of the company's capacity in 2014, versus 7% in 2009) and added more transcontinental and midcontinental routes (22% vs. 17%). Flights to Alaska and West Coast destinations combined for 51% of capacity in 2014, down from 65% in 2009.

Since April 2014 the company has expanded into 18 new markets. Management says 70% of these new markets were profitable within their first year of operation and 50% should remain profitable if fuel costs climb to $3 per gallon.

As fuel prices began to rise this spring, some airlines scrambled to reinstall hedges abandoned during the oil route. The volatility has played to Alaska Air's consistent and conservative stance on fuel prices. It entered 2015 with 42% of expected fuel needs hedged. Currently 50% of fuel needs are hedged for the second half of the year.

Conclusion

For the September quarter, management expects capacity to climb 8.0%, while fuel costs are projected to fall 40% to $1.90 per gallon. The consensus estimate calls for per-share profits of $2.02, up 37%, on revenue growth of 4%.

An annual report for Alaska Air Group Inc. is available at 19300 International Blvd., Seattle, WA 98188, (206) 392-5040, www.alaskaair.com.

ALASKA AIR
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '15
1.76
vs.
1.13
5%
68.68
-
58.15
15 - 12
Mar '15
1.12
vs.
1.28
4%
71.40
-
57.71
15 - 12
Dec '14
0.94
vs.
0.55
8%
60.94
-
40.69
14 - 9
Sep '14
1.47
vs.
1.11
7%
50.14
-
41.84
12 - 10
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2014
5.37
4.18
0.50
60.94
-
36.28
15 - 9
2013
4.96
2.70
0.20
39.26
-
21.66
15 - 8
2012
4.66
2.37
0.00
22.57
-
15.65
10 - 7
2011
4.32
1.96
0.00
19.28
-
12.77
10 - 7
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
99
93
70
97
77
98
87

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.


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