Alaska Air Group (ALK) Hurt by Higher Costs: Time to Dump?
While designing the portfolios, investors solely aim at raking in handsome returns. Hence, they prefer adding the well-performing stocks to their portfolios and get rid of the underperformers.
One such stock that investors would do well to avoid for the time being is Alaska Air Group ALK. We’ll tell you why.
High Costs Likely to Hurt Q3
Of late, Alaska Air Group has been laid low by escalating costs and the third quarter is likely to be no different. Evidently, pilots of Horizon Air, a subsidiary of Alaska Air Group, approved an amendment to the existing eight-year pay-related contract in May 2017. This, in turn, has contributed to the spike in labor costs as pilots' compensation has shot up following the amendment.
Following the agreement, Alaska Air Group projects current-quarter cost per available seat mile (excluding fuel and other special items) between 8 cents and 8.05 cents. Even though positive on the Virgin America deal, we note that this transaction like any merger has integration risks attached to it. In fact, merger-related costs contributed to the 50% rise in total operating expenses (on a reported basis) in the second quarter of 2017. Notably, merger-related costs are likely to hurt the bottom line in the third quarter as well.
Moreover, the increase in fuel costs are expected to limit bottom-line growth. Fuel cost is projected to be $1.76 per gallon in the third quarter of 2017, reflecting an improvement of approximately 12% over the year-ago figure.
In fact, weather-related headwinds like Harvey have hurt not only Alaska Air Group but other airline players as well.
Certainly Not a Broker Favorite
Given the challenges faced by the company, it is natural that the stock is not a favorite of brokers right now. The stock has seen the Zacks Consensus Estimate for current-quarter earnings being revised 9.2% downward over the last 60 days.
Furthermore, it is in the best interests of investors to be guided by broker advice and the direction of their estimate revisions, given the wealth of information at the disposal of brokers. Markedly, the direction of estimate revisions serves as an important pointer when it comes to the price of a stock.
Additionally, Alaska Air Group’s Momentum Score of F highlights its short-term unattractiveness.
Price Performance
Shares of Alaska Air Group have struggled so far this year, due to the above headwinds. Consequently, the stock has underperformed its industry on a year-to-date basis. The stock has been down 15.7%, as against the industry’s gain of 9.6%.
In Conclusion
Taking into account the above-mentioned headwinds and the unfavorable readings, we advise investors to avoid the stock at the moment. The Zacks Rank #5 (Strong Sell) carried by the stock also suggests the same.
Stocks to Consider
Better-ranked stocks in the same space that the investors can consider are SkyWest SKYW, Air France-KLM SA AFLYY and Deutsche Lufthansa DLAKY. While Air France and Deutsche Lufthansa sport a Zacks Rank #1 (Strong Buy), SkyWest holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Air France and Lufthansa have witnessed their respective stock prices soar in excess of 100% on a year-to-date basis.
SkyWest has witnessed the Zacks Consensus Estimate for current-year earnings being revised 1.6% upward over the last 60 days.
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SkyWest, Inc. (SKYW) : Free Stock Analysis Report
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