Will Alaska Air Stock Rebound To Its Pre-Inflation Shock Highs of $70?

Alaska Air stock (NYSE: ALK) currently trades at $37 per share, more than 45% below its level in March 2021, and it seems like it can see higher levels over time. Alaska Air, one of the large players in the country’s airline industry, saw its stock trading at around $40 in June 2022, just before the Fed started increasing rates, and is still 8% below that level. The stock has declined 5% since its low in September 2022 compared to the S&P 500, which gained about 27% during this period. The decline in the stock over recent months can be attributed to a downbeat Q3 and the company lowering its full-year 2023 outlook. Also, while there has been a steady decline in the inflation rate in response to the Fed’s aggressive rate hike plan, investors still have concerns about a potential recession.

Looking at a slightly longer term, ALK stock has suffered a sharp decline of 30% from levels of $50 in early January 2021 to around $35 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. ALK has had a poor run, with the stock losing value in each of the last 3 years. Returns for the stock were 0% in 2021, -18% in 2022, and -13% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% in 2023 (YTD) – indicating that ALK underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the industrial sector, including UNP, BA, and UPS, and even for the mega-cap stars GOOG, TSLA, and MSFT.
In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could ALK face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months – or will it see a recovery? Returning to the pre-inflation shock level means that ALK stock will have to gain more than 90% from here. However, we do not believe that will materialize any time soon and estimate Alaska Air’s Valuation to be $47 per share, reflecting over 20% upside from its current levels of $37. Our forecast is based on a 10x P/E multiple for ALK and expected earnings of $4.75 on a per-share and adjusted basis for the full year 2023. The company lowered its earnings outlook to now be in the range of $4.25 and $4.75 (vs. the $5.50 and $7.50 range earlier).

Our detailed analysis of Alaska Air’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
• April 2021: Inflation rates cross 4% and increase rapidly.
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
• Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, although another rate hike remains in the cards.

In contrast, here’s how ALK stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Alaska Air and S&P 500 Performance During 2007-08 Crisis

ALK stock declined marginally from nearly $1.46 in September 2007 (pre-crisis peak) to $1.37 in March 2009 (as the markets bottomed out). It recovered after the 2008 crisis to levels of around $2.16 in early 2010, rising over 55% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

Alaska Air’s Fundamentals Over Recent Years

Alaska Air’s revenue plunged from $8.8 billion in 2019 to $3.6 billion in 2020 due to the impact of the COVID-19 pandemic. Sales rebounded in subsequent years to $9.6 billion in 2022, with a recovery in travel demand.  However, looking at the recent past, the company’s revenue of $2.8 billion in Q3’23 was flat y-o-y. Although the company reported a 14% rise in available seat miles, the load factor was down 190 bps and yield declined 10%, weighing on the overall top-line growth.

The company’s earnings stood at $0.46 on a per-share and reported basis in 2022, compared to the $6.24 figure in 2019. Looking at 2023, Alaska Air lowered its earnings outlook to now be in the range of $4.25 and $4.75 (versus the $5.50 and $7.50 range earlier).

Does Alaska Air Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

Alaska Air’s total debt increased from $3.2 billion in 2019 to $4.1 billion now, while its cash increased from $1.5 billion to $2.5 billion over the same period. The company also garnered $1.1 billion in cash flows from operations in the last twelve months. Given its cash cushion, Alaska Air is in a position to service its near-term obligations.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe ALK stock has the potential for more gains once fears of a potential recession are allayed. That said, unfavorable macroeconomic factors and rising fuel costs are potential risk factors for realizing these gains.

While ALK stock can see higher levels, it is helpful to see how Alaska Air’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Month-to-date and year-to-date as of 11/26/2023
[2] Cumulative total returns since the end of 2016

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