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Why Is Alaska Air (ALK) Down 9.3% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for Alaska Air Group (ALK). Shares have lost about 9.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Alaska Air due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Alaska Air Group Beats on Q2 Earnings

Alaska Air Group delivered second-quarter 2019 adjusted earnings per share (excluding 6 cents from non-recurring items) of $2.17, beating the Zacks Consensus Estimate of $2.11. Moreover, the bottom line improved substantially year over year on higher revenues.

Revenues came in at $2,288 million, above the Zacks Consensus Estimate of $2,282 million. The top line also rose year over year. Passenger revenues — accounting for a bulk (92.3%) of the top line — were up 6% on a year-over-year basis.

Operating Statistics

Airline traffic, measured in revenue passenger miles, inched up 1.1% year over year in the reported quarter. Capacity or available seat miles expanded 0.9%. Load factor (percentage of seats occupied by passengers) improved 20 basis points to 86.2% as traffic growth outpaced capacity expansion in the quarter under review.

Total revenue per available seat mile (RASM: a key measure of unit revenues) increased 5.2% year over year to 13.48 cents in the quarter under discussion. Meanwhile, yield climbed 4.6% to 14.43 cents.

Operating Expenses & Income

In the quarter under review, total operating expenses were up 2% year over year to $1,924 million. Operating income jumped 34% from the prior-year quarter to $364 million. Fuel price (economic) was $2.27 per gallon, down 1.3%.

Consolidated cost per available seat mile — excluding fuel and special items — nudged up 2.3% to 8.33 cents.

Liquidity & Buybacks

At the end of the reported quarter, the company had $1,627 million in cash and marketable securities compared with $1,236 million at the end of 2018.

Alaska Air exited the quarter with long-term debt of $1,538 million compared with $1,617 million at the end of 2018. Adjusted debt-to-capitalization ratio was 45% compared with 47% in December 2018. The carrier repurchased 408,665 shares worth approximately $25 million during the first half of the year.

Q3 Outlook

The company envisions capacity to rise approximately 3% year over year in the third quarter. Additionally, RASM is estimated to increase in the 2-5% range. However, non-fuel unit costs (excluding special items) are projected to increase approximately 5% year over year. This includes a $34-million expected increase in labor-related costs. Meanwhile, economic fuel cost is forecast to decline 5.2% year over year to $2.21 in the current quarter.

2019 Outlook

For the full year, capacity is estimated to expand approximately 2.1% (prior view: increase of 2%) while non-fuel unit costs (excluding special items) are expected to rise nearly 2.2% compared with an increase of 2.1% expected earlier. The view includes costs associated with labor deal ratification and other employee-related costs. Also, capital expenditures are anticipated to be $725 million in the ongoing year, lower than $750 million estimated previously. Meanwhile, effective tax rate is still predicted to be approximately 26% in the year.

Airline traffic, measured in revenue passenger miles, rose 44.2% year over year to 13,554 million in the reported quarter. Capacity or available seat miles increased 41.1% to 15,612 million. Load factor (percentage of seats filled by passengers) increased 190 basis points to 86.8% owing to traffic growth outpacing capacity expansion.

Passenger revenue per available seat mile (PRASM: a key measure of unit revenues) increased 1.3% year over year to 11.57 cents. While total revenue per available seat mile (RASM) declined 0.4% to 13.46 cents in the reported quarter, yield declined 0.8% to 13.33 cents.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -10.01% due to these changes.

VGM Scores

Currently, Alaska Air has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Alaska Air has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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