What Does Alaska Air Group’s Current Valuation Indicate?
Why Alaska Air Group's Upbeat 1Q16 Results Left Investors Flat
Current valuation
As of April 21, 2016, Alaska Air Group (ALK) had a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of ~5.0x. This is higher than its average of ~3.9x since November 2011.
Peer comparison
Analysts are expecting ALK’s EBITDA to grow by 14% in the next four quarters, which is lower than only JetBlue Airways (JBLU).
Spirit Airlines’ (SAVE) EBITDA is expected to grow by 4%, Allegiant Travel’s (ALGT) EBITDA is expected to grow by 5%, Southwest Airlines is expected to grow by 10%, Alaska Air Group (ALK) is expected to grow by 13%, and JetBlue Airways’ EBITDA is expected to grow by 21%.
The 2016 EBITDAs of legacy peers Delta Air Lines (DAL), American Airlines (AAL), and United Continental (UAL) are expected to grow by ~24%, 9%, and 5%, respectively.
Our analysis
In the short term, Alaska Air Group’s (ALK) ability to seamlessly integrate Virgin America (VA), as well as the potential synergy benefits, should impact its valuation multiple.
In the long term, the airline industry fundamentals, which are driven by macro indicators such as economic growth and crude prices, should have a greater impact on the company’s valuation multiple. If industry fundamentals deteriorate or investors lose their appetite for risk, the valuation multiples can fall, too.
On the other hand, an improving global travel and economic outlook would be a huge positive. Investors should watch out for those signs by following our airline industry insights.
Investors should also keep an eye on ALK’s capacity expansion plans with respect to demand growth and its impact on utilization. Future expected margins should also be tracked, especially as it now plans to take on higher debt. Higher leverage tends to make a company more volatile.
Alaska Air Group (ALK) comprises ~4.0% of the DWA Consumer Cyclicals Momentum ETF (PEZ).
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