Seattle, WA based Alaska Air Group, Inc. (ALK) has lately been the shining star of the airline industry. Shares of the carrier gained 47% over the last six months, comfortably outperforming the Zacks categorized Transportation- Airline industry, which has advanced only 30.5% during the period.
A slew of factors have led to the outperformance. Let’s delve into the details.
Virgin America Buyout : A Major Positive
On Dec 14, 2016, Alaska Air Group completed the purchase of Virgin America Inc (VA), thereby becoming the fifth-largest U.S. airline (in terms of passenger traffic). The acquisition has expanded Alaska Air Group’s presence considerably, particularly in the West Coast.
Also, it has provided Alaska Air Group with significant growth opportunities in the key East Coast markets.
The merged entity will provide 1,200 departure options per day to 118 destinations across the U.S., Mexico, Canada, Costa Rica and Cuba. The merger resulted in the creation of a vast network offering flights to more than 800 destinations across the globe.
ALK’s Strong Q4 Impressed Analysts
Although the impact of the merger was limited in the fourth quarter, it gave a boost to quarterly results. The carrier performed impressively in the fourth quarter of 2016 reporting higher-than-expected earnings and revenues. Both metrics also improved on a year-over-year basis.
Additionally, total revenue per available seat mile (RASM: a key measure of unit revenue) returned to growth at Alaska Air Group in the quarter, for the first time since the second quarter of 2014. The metric climbed 0.3% on a year-over-year basis in the quarter. This a major positive, as woes related to unit revenues have hurt the carrier and its peers like Delta Air Lines, Inc. (DAL) and Southwest Airlines Co (LUV) for quite some time.
ALK’s Dividend Hike Sweetens the Pot
We are impressed by the company’s move to hike its quarterly dividend by 9% to 30 cents per share. The dividend hike marks the fourth increase in payout, ever since it started paying quarterly dividend in Jul 2013.
The company has been making constant efforts to reward its shareholders though dividends/buybacks. During 2016, the company returned $329 million to shareholders through buybacks ($193 million) and dividend payments ($136 million).
We note that earnings estimates for Alaska Air Group have exhibited a healthy uptrend. Over the last 90 days, the full-year 2017 Zacks Consensus Estimate of earnings has gone up over 21% to $8.03 per share on the back of multiple upward revisions. Likewise, the Zacks Consensus Estimate for the first quarter of 2017 has jumped more than 8% over the last three month to $1.20 per share as analysts are highly bullish on the stock.
ALK’s Valuation Suggests ALK Stock is Undervalued
In terms of enterprise value (EV) to EBITDA ratio, which is often used to value airline companies, Alaska Air Group appears to be undervalued compared to the market at large. The company currently has a trailing 12-month EV/EBITDA ratio of 7.4 compared with the S&P 500‘s 10.62.
Also, in terms of return on equity (ROE), the stock appears to be attractive. Its ROE of 33.5% compares favorably with the S&P 500 figure of 15.3%. Moreover, the company’s expected earnings per share growth rate of 12% (3 to 5 years) is higher than the comparable S&P 500 figure of 9.5%.
The Bottom Line: ALK Will Soar in Your Portfolio
In view of the above positives, we recommend the addition of Alaska Air Group to one’s portfolio. The Zacks Rank #2 (Buy) carried by the stock suggests the same. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Another Airline Stock to Consider
Apart from Alaska Air Group, investors interested in the airlines industry may also consider SkyWest, Inc. (SKYW), which also carries a Zacks Rank #2.
SkyWest has an impressive history with respect to earnings per share, having outshined the Zacks Consensus Estimate in each of the last four quarters by an average of 34.6%.
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