Considering Whether to Purchase, Sell, or Maintain Your Alaska Air Group Shares
Considering Whether to Purchase, Sell, or Maintain Your Alaska Air Group Shares
Alaska Airline's (ALK) NYSE stock has experienced a near 20% surge this month, following the company's updated Q4 forecast. Alaska now anticipates earnings ranging from $0.40 to $0.50 per share, a significant climb from its previous expectation of $0.20 to $0.40. The surge is attributed to the acquisition of Hawaiian Airlines and the implementation of the "Alaska Accelerate" program, aiming for $500 million in cost savings, $1 billion in additional profits, and earnings of at least $10 per share by 2027. As a related aside, check out What's Going on with Mastercard's Stock?
Examining a broader timeframe, the price of Alaska Airline stock has risen 48% since its $43 value in early 2023, reaching a current price of $63. This growth can be credited to:
- A 54% increase in the company's trailing P/E ratio from 10x in 2022 to 15x currently; partly neutralized by
- A 4% decrease in the company's adjusted earnings from $4.35 in 2022 to $4.18 now.
Delving deeper, the factors at play include:
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What Held Back Alaska's Earnings Growth?
Alaska's earnings decline of 4% since 2022 primarily originated from a shrinking margin. Alaska Air's revenue climbed from $9.6 billion in 2022 to $10.8 billion presently. The aviation industry has witnessed a notable surge in air travel demand following the pandemic, with Alaska exhibiting a 16% increase in capacity from 60.8 billion in 2021 to 70.5 billion now. Despite the revenue increase, Alaska's occupancy rate and yields have trended downward over this period.
Although sales grew, the company's adjusted net margin shrank from 5.8% to 5.0% during the same span. Consequently, earnings dropped to $4.18 per share throughout the past year, down from $4.35 per share in 2022.
What Led to Rising Valuation Multiple?
Recently, investors have boosted Alaska Airline stock due to enhancements in profitability in the most recent quarter. The company's consolidated pre-tax margin in Q3 increased by 390 bps y-o-y, and oil prices have dipped to $2.11 per gallon (Jet fuel) after reaching $2.60 higher levels in July due to Middle Eastern geopolitical tensions. This development benefits airline stocks overall, considering fuel constitutes over a quarter of their operational expenses. Furthermore, the Federal Reserve's rate cuts favor Alaska, taking into account its high debt-to-equity ratio of 75%, with a total debt of $6.1 billion. Alaska's profitability will improve as lower interest expenses are incurred. Also, the company's optimistic prediction for 2027 features a 2.3x expected earnings growth between 2024 and 2027. Lastly, overall travel demand stays robust, promoting the company's revenue growth and investor confidence.
Does ALK Stock Have Further Room for Growth?
Currently, ALK stock is up an impressive 60% this year, but it appears to have little remaining room for growth at its $63 price point. However, in recent years, that wasn't always the case. ALK endured a rough patch, seeing its stock value decrease in each of the previous three years. Returns for the stock were 0% in 2021, -18% in 2022, and -9% in 2023. In contrast, the Trefis High-Quality Portfolio, comprised of 30 stocks, displays less volatility. And it has outperformed the S&P 500 each year during the same period. Why so? Portfolio stocks provided better returns with lower risk compared to the index, as can be seen in the High-Quality Portfolio performance metrics.
Given the current unstable macroeconomic environment, including rate cuts and geopolitical issues, could ALK stock reach higher levels? We project *Alaska Air's Valuation* to be $66 per share, representing a 5% upside from its present $63 value. Our estimate is based on 16x trailing adjusted earnings of $4.18 per share, slightly higher than the stock's average P/E ratio of 15x over the last three years. We believe a rise in valuation multiple for Alaska seems reasonable, given the company's promising earnings outlook for the coming years.
Although ALK stock might have limited room for growth at present, it can be insightful to examine how *Alaska's competitors perform on key metrics. You can discover more comparisons between companies across industries at Peer Comparisons. Additionally, investigate *Is Pfizer Stock Overpriced?*
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- Alaska Airlines' Q4 earnings forecast revision and the projected revenue growth from the acquisition of Hawaiian Airlines have contributed to an increase in ALK's valuation multiple.
- In Q4, Alaska Airlines witnessed a significant surge in its consolidated pre-tax margin, which has positively impacted Alaska Airlines' stock price and contributed to the rise in its valuation multiple.
- The implementation of the "Alaska Accelerate" program and the acquisition of Hawaiian Airlines are expected to increase Alaska Airlines' revenue and profitability, leading to an increase in ALK's revenue and potentially its valuation multiple in the future.