Analysts' Choice: Don't Be Afraid To Fly Alaska Air

9/12/2016


  Recent Price
$71
  Dividend
$1.10
  Yield
1.5%
  P/E Ratio
10
  Shares (millions)
124
  Long-Term Debt As % Of Capital
16%
  52-Week Price Range
$87.17 - $54.51

Alaska Air Group ($71; ALK) is only the sixth-largest U.S. airline as measured by capacity, but don't make the mistake of dismissing the company as small. Alaska transports 32 million passengers per year between more than 110 cities, averaging 970 flights each day.

At 10 times trailing earnings, Alaska trades 19% below its five-year average P/E ratio. Most of the industry has taken a pounding this year despite strong operating momentum. Over the last 12 months, Alaska's operating cash flow has jumped 24% and per-share profits 35%.

Profit-growth targets have eroded in recent weeks, mostly because of rising fuel prices — something we all knew would happen eventually. However, analysts now project profit declines of at least 4% in each of the next two quarters and a gain of less than 2% in 2017, targets that seem a bit too conservative. We rate Alaska Buy and Long-Term Buy.

A winning ticket

Because of the myriad industry-specific factors that affect airlines, it's tempting to group them all together in your mind. Avoid the temptation, because Alaska differs from its peers in at least three ways:

1) Nonfuel unit costs fell 3.7% in the June quarter, and the company expects a 0.5% decline for the full year. Unit costs have declined gradually over the last six-plus years (about 0.5% to 1% a year), while the broader industry's costs rose. Alaska believes its ability to reduce nonfuel costs has translated into about $4 per share in earnings, illustrating the power of efficiency gains in a high-fixed-cost business. In the 12 months ended June, Alaska earned $7.19 per share.

2) Alaska routinely earns high marks for both industry operating metrics and consumer appeal. Among the six largest U.S. airlines, the company was tops in on-time performance for the first half of the year at 88.1%. In August, U.S. News & World Report ranked Alaska's airline-rewards program best in the country for the second straight year, and a global survey ranked Alaska second-best among U.S. carriers as most loved. The only better-loved airline? Virgin America ($56; VA), which Alaska expects to purchase in the next few weeks.

3) While Alaska did partake during the industry's expansion binge over the last two years, it has figured out when to slow down. In the June quarter, Alaska's capacity growth of 11% lagged the 13% growth in competitors' capacity in the markets Alaska serves. The company's expansion doesn't seem excessive, given the moves made by rivals, most notably Delta Air Lines ($39; DAL). In July, Alaska said it expects capacity growth to slow to 8% in the third quarter and 3% in the fourth quarter.

Sharing with stockholders

Alaska's share count declined 5% over the last year and 13% over the last three years. The company has cut back on its buybacks since announcing the Virgin deal but plans to keep growing the dividend. The per-share payout rose 46% over the last year and has nearly tripled since the company initiated the dividend in 2013.

Obtain an annual report for Alaska Air Group Inc. 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
Jun '16
2.12
vs.
1.76
4%
83.26
-
61.58
12 - 9
Mar '16
1.45
vs.
1.12
6%
87.17
-
64.18
13 - 10
Dec '15
1.46
vs.
0.94
5%
82.78
-
58.92
14 - 10
Sep '15
2.16
vs.
1.47
3%
77.80
-
58.15
15 - 11
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
5.60
6.51
0.80
87.17
-
57.71
13 - 9
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
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
94
64
93
97
90
45
21

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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