Should You Pick Alaska Airlines Stock At $45 After Q1 Beat?

Alaska Air (NYSE: ALK) recently reported its Q1 results, with top line and bottom line exceeding the street estimates. The company reported revenue of $2.23 billion and an adjusted loss per share of $0.92, compared to the consensus estimates of $2.18 billion in sales and loss per share of $1.09. Better load factor and yields aided the company’s overall performance. In this note, we discuss Alaska Air’s stock performance, key takeaways from its recent results, and valuation.

Firstly, looking at its stock performance, ALK stock has seen little change, moving slightly from levels of $50 in early January 2021 to around $45 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 Industrials sector including CAT, GE, and UNP, and even for the megacap 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 strong jump? From a valuation perspective, ALK stock looks attractive and will likely see higher levels over time. We estimate Alaska Air’s Valuation to be $56 per share, reflecting over 20% upside from its current levels of $45. Our forecast is based on a 12x P/E multiple for ALK and expected earnings of $4.53 on a per-share and adjusted basis for the full year 2024. The company expects its 2024 earnings to be in the range of $3.25 and $5.25.

Looking at the latest quarter, Alaska Air’s revenue of $2.2 billion was up 2% y-o-y. While the company reported a 2% fall in available seat miles, its load factor was up 150 bps, and yield also rose 1%, bolstering the overall top-line expansion. The company saw its consolidated adjusted pre-tax margin plunge to -7% from -5.2% in the prior-year quarter. The margin contraction resulted in a net loss widening to $0.92 per-share, compared to $0.62 loss per share in the prior-year quarter.

Alaska Air’s profitability was weighed down due to the grounding of Boeing 737 MAX aircraft earlier this year. There was an incident in which the cabin side panel detached midair on Alaska Air (Boeing 737 Max 9) flight 1282 on January 9, 2024. Following the incident, the Federal Aviation Administration grounded Boeing 737 Max 9 aircraft. The company inspected its fleet and the aircraft returned to service in February. It should be noted that Boeing paid $162 million to Alaska Air in initial cash compensation for the financial impact on Alaska Air due to the grounding of Boeing’s 737 MAX airplanes.

Overall, Alaska’s performance in Q1 was better than expectations, and it has raised its earnings outlook for the full-year. Despite its over 15% rise this year, we think ALK stock has more room for growth from here.

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 4/20/2024
[2] Cumulative total returns since the end of 2016

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