Should You Pick Alaska Air Stock At $37 After Q4 Beat?

Alaska Air (NYSE: ALK) recently reported its Q4 results, with revenues and earnings above the street estimates. The company reported revenue of $2.6 billion, reflecting a 3% growth from the prior year period and marginally above the $2.5 billion street estimate. Its adjusted earnings of $0.30 per share were down 67% y-o-y but comfortably above the consensus estimate of $0.18 per share. In this note, we discuss Alaska Air’s stock performance, key takeaways from its recent results, and valuation.

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 30% for the S&P 500 over this roughly three-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 -9% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – 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 CAT, UNP, and GE, 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? From a valuation perspective, ALK stock looks attractive and will likely see higher levels over time. We estimate Alaska Air’s Valuation to be $49 per share, reflecting over 30% upside from its current levels of $37. Our forecast is based on an 11x P/E multiple for ALK and expected earnings of $4.67 on a per-share and adjusted basis for the full year 2024. The company expects its earnings to be in the range of $3.00 and $5.00, including the $150 million impact from the grounding of the company’s Boeing 737-9 MAX fleet.

Alaska Air’s revenue of $2.6 billion in Q3 was up 3% y-o-y. The company reported a 14% rise in available seat miles, while the load factor was down 260 bps, and yield also declined 7%, weighing on the overall top-line expansion. The company saw its consolidated adjusted pre-tax margin plunge to 0.2% from 1.4% in the prior-year quarter. Higher revenues and margin contraction led to a 67% y-o-y fall in the bottom line to $0.30 on a per-share and adjusted basis in Q4’23. The results boded well with the investors, evident from its stock price appreciation of 4% last week.

Despite its recent rise, ALK stock looks attractive at $37, trading at just 0.5x sales, compared to the last five-year average of 1.0x. However, higher fuel prices, falling yields, and grounding of Boeing Max 9 aircraft remain some key risk factors in the near term.

While ALK stock looks undervalued, 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] Returns as of 1/29/2024
[2] Cumulative total returns since the end of 2016

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