Stock Spotlight

Turbulence shakes Alaska Air shares

Recent Price
$46
Dividend (estimated)
$0.50
Yield (estimated)
1.1%
P/E Ratio
9
Shares (millions)
139
Long-Term Debt as % of Capital
25%
52-Week Price Range
$50.49 - $28.03

Like many pockets of the S&P 1500 Index, the airline industry has struggled in the past month, its six stocks averaging a loss of 3%. Alaska Air Group ($46; ALK) shares have fared even worse, slumping 11%.

Competitive headwinds buffeted Alaska Air's stock, with concerns centering on rival Delta Air Lines ($40; DAL) adding new routes in key markets. Alaska Air anticipates rivals will increase capacity 9% in the September quarter and 12% in the December quarter.

That industry projection coincides with Alaska Air's own plans to ramp capacity, up 5% in the first half of 2014, by 8% and 11% respectively for the final two quarters of 2014. Expansion costs could pressure the airline's profitability, but it's worth noting Alaska Air just delivered its highest operating profit margins for a June quarter since at least 1979.

Alaska Air also jumped off to a strong start for the September quarter, reporting 7% higher traffic in July, ahead of the 5% growth in the first half of 2014. July's revenue passengers increased 8%, up from 5% growth for six months ended June.

Airline stocks often perform well during the middle stages of an economic upswing, when growth is fairly stable. A relatively predictable growth pattern helps airlines strike the right balance between protecting airfares and expanding capacity.

We still see a decent-sized runway ahead for both the U.S. economy and Alaska Air. The stock is a Focus List Buy and a Long-Term Buy.

Reasons for optimism

Despite the recent altitude loss, we advise against bailing on Alaska Air shares for the following reasons:

• Solid growth outlook — The consensus expects Alaska Air to grow per-share profits 24% in the second half of 2014, slightly ahead of its industry average of 22%. Sales are projected to climb 8% for Alaska Air, compared to 9% for its industry peers.

• Attractive valuation — Even after the recent decline, Alaska Air shares have produced a total return of 20% so far in 2014. Yet the stock trades at just 13 times trailing earnings and 12 times estimated 2014 earnings — both P/E ratios are 24% below the median for S&P 1500 airline stocks. Alaska Air's Quadrix Value rank of 88 also exceeds its industry average of 84.

• Robust balance sheet — While some rivals are swamped with debt, Alaska has net cash of $651 million, which translates to 11% of the share price, nearly double any other S&P 1500 airline.

• Outstanding Quadrix scores — Both sector-specific ranks top 80, including a maximum Reranked Overall score of 100. The stock earns above-average Quadrix scores for all six categories, with three exceeding 90. The Overall score of 100 ranks No. 1 in the industry. All scores top peer-group averages.

• Shareholder-friendly management — The stock's dividend yield of 1.1% ranks second-highest in its industry. Last month, Alaska launched a $650 million stock-buyback program, equaling about 10% of its market value at the time of the announcement.

An annual report for Alaska Air Group 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 '14
$1.13
vs.
$0.74
9%
$50.49
-
$43.88
17 - 14
Mar '14
0.64
vs.
0.31
8%
48.38
-
36.31
18 - 13
Dec '13
0.55
vs.
0.35
7%
41.04
-
34.81
16 - 14
Sep '13
1.11
vs.
1.05
7%
35.72
-
28.03
15 - 11

 
Year (Dec.)
Sales (Bil.)
Per-Share Earnings*
Per-Share Dividend
52-Week Price Range
P/E Ratio Range
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
1.93
0.00
19.28
-
12.77
10 - 7
2010
3.83
1.79
0.00
14.90
-
7.81
8 -4

 
Quadrix Scores†
Overall
Momentum
Value
Quality
Financial Strength
Earnings Estimates
Performance
100
95
88
97
74
93
73

* Earnings exclude special items. NM Not Meaningful.
† Quadrix® scores are percentile ranks, with 100 the best.
e Dividend and yield estimated.

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Turbulence shakes Alaska Air shares

Wednesday, August 27, 2014

Like many pockets of the S&P 1500 Index, the airline industry has struggled in the past month, its six stocks averaging a loss of 3%. Alaska Air Group ($46; ALK) shares have fared even...

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