Unlike most airlines, Alaska Air Group Inc. (ALK) has a solid balance sheet, has been consistently profitable the last several years and generates solid profit margins and attractive returns on capital.
It's also coming off its second best March quarter ever despite a 19% increase in fuel costs. This marked the company's 7th positive earnings surprise in the last 8 quarters. And analysts have been raising their estimates recently thanks to a sharp drop in oil prices. It is a Zacks #1 Rank (Strong Buy) stock.
The valuation picture looks very attractive with shares trading at just 7x 12-month forward earnings and 6x cash flow. And it sports a PEG ratio of just 0.4.
Alaska Air Group is the holding company for Alaska Airlines and its subsidiary Horizon Air. The company serves more than 90 destinations throughout North America.
It is headquartered in Seattle (no, not Alaska) and has a market cap of $2.6 billion.
First Quarter Results
Alaska Air reported strong first quarter results on April 19. Earnings per share came in at 39 cents, well ahead of the Zacks Consensus Estimate of 35 cents. This was the company's second most profitable Q1 in its history.
Total operating revenues rose 8% year-over-year to $1.039 billion, essentially in-line with the consensus. Total passenger revenue also rose 8% as revenue passenger miles, or 'traffic', increased 7%.
Economic fuel cost soared 19% to $3.41 per gallon. But the cost per available seat mile excluding fuel (CASMex) was up just 1%.
Analysts revised their estimates higher for Alaska Air following its solid Q1 results. And they have continued raising them as oil prices have fallen sharply over the last several weeks:
It is a Zacks #1 Rank (Strong Buy) stock.
Based on current consensus estimates, analysts are projecting 24% EPS this year and 11% growth next year.
Despite its strong earnings momentum, shares of ALK trade at just 7x 12-month forward earnigns, a discount to the industry median of 10x. Its price to cash flow ratio is 6, below the peer group multiple of 8.
Based on a consensus 5-year EPS growth rate of 18%, Alaska Air's PEG ratio is an attractive 0.4.
The Bottom Line
With strong earnings momentum, solid growth projections and very reasonable valuation, Alaska Air may soon be flying higher.
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