Analysts' Choice: Keep Flying With Alaska Air

1/18/2016


  Recent Price
$68
  Dividend
$0.80
  Yield
1.2%
  P/E Ratio
11
  Shares (millions)
128
  Long-Term Debt As % Of Capital
20%
  52-Week Price Range
$87.17 - $58.15

Alaska Air Group ($68; ALK) scores in the top 25% of our research universe for all six Quadrix categories. The same can be said for just two other stocks in the S&P 1500. Yet there's a lot more to Alaska than high Quadrix scores.

Like most other airlines, Alaska Air looks cheap versus other stocks in our research universe, reflected by its Value rank of 76. But the shares look pricier relative to peers at nine times estimated 2016 earnings (versus the industry average of eight).

We view that modest premium as reasonable for at least three reasons:

1) Alaska Air offers superior operating momentum, with per-share profits up 56% over the 12 months ended September (industry average of 28%) on 5% higher sales (4%).

2) The stock promises superior growth potential, with per-share profits projected to rise 21% over the next 12 months, (industry average of 19%) on 6% higher revenue (4%). Encouragingly, analyst estimates have climbed over the past 30 days. Management has a track record for managing expectations, topping the consensus profit estimate in each of the past eight quarters.

3) Alaska also enjoys solid price momentum, with shares up 10% over the past year, versus an average decline of 6% for the industry.

Alaska Air is a Focus List Buy and a Long-Term Buy.

Flying with the eagles

Few industries in the S&P 1500 Index are generating stronger growth than airlines, averaging 28% higher per-share profits over the past 12 months. Yet their shares average P/E ratios of just nine. Among S&P 1500 industries containing more than four stocks, only energy drillers and refiners are cheaper. 

Lingering investor distrust for airlines stems in part from the industry's massive fixed costs, exposure to oil prices, price-sensitive customers, and history of cyclical turbulence. The industry's profitably can come tumbling down if a couple airlines panic or become irrationally exuberant.

Of course, airlines best serve their interests by showing restraint in expanding capacity and adjusting prices. And in the opening days of 2016, most U.S. carriers, including Alaska, cooperated to raise prices by about $3 on one-way domestic flights.

A 33% decline in fuel expenses in the first nine months of 2015 boosted Alaska's bottom line. The company has hedged about one-third of expected 2016 fuel needs. Fuel prices won't remain low forever, and Alaska has cut costs to preserve profitability. In October, the company said it was on pace to reduce nonfuel unit costs 1% in 2015, which would mark a sixth straight annual decline.

Capacity still rising

The company's capacity surged 11% in 2015, its fastest clip since 1995. Rivals expanded even faster, with capacity in Alaska Air's markets up more than 13% in the first nine months of 2015. Alaska expects its capacity growth to reach 13% in the March quarter, then slow, with competitive capacity peaking at 15% growth in the March quarter.

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 GROUP
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Sep '15
2.16
vs.
1.47
3%
82.78
-
58.92
16 - 11
Jun '15
1.76
vs.
1.13
5%
77.80
-
58.15
17 - 12
Mar '15
1.12
vs.
0.64
4%
69.42
-
61.35
17 - 15
Dec '14
0.94
vs.
0.55
8%
71.40
-
53.11
19 - 14
           
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
2.32
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
91
76
99
84
93
85

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


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