What’s Behind The 20% Rise In Alaska Air Stock This Month?

Alaska Air stock (NYSE: ALK) is up nearly 20% in this month after the company raised its Q4 outlook. Alaska now expects its Q4 earnings to be in the range of $0.40 and $0.50 per share, versus its prior guidance of $0.20 to $0.40. The company will benefit from its recently closed acquisition of Hawaiian Airlines. It also announced the “Alaska Accelerate” program, which aims at $500 million in cost synergies, $1 billion in incremental profits, and earnings of at least $10 per share by 2027. 

Looking at a slightly longer period, Alaska has seen its stock rise 48% from levels of $43 in early 2023 to $63 now. This can be attributed to:

1. a 54% rise in the company’s trailing P/E ratio from 10x in 2022 to 15x now; partly offset by
2. a 4% fall in the company’s adjusted earnings from $4.35 in 2022 to $4.18 now.

Let’s dive deeper into these factors. Separately, if you want upside with a smoother ride than an individual stock, consider the High-Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

What Weighed On Alaska’s Earnings Growth?

Alaska’s earnings decline of 4% since 2022 was primarily driven by margin contraction. Alaska Air’s revenue rose from $9.6 billion in 2022 to $10.8 billion now. Airlines at large have seen a strong rebound in air travel demand after the pandemic. Alaska has seen its capacity expand 16% from 60.8 billion in 2021 to 70.5 billion now. However, the company’s occupancy rate and yields have trended lower over this period.

Although the company saw its sales rise, its adjusted net margin contracted from 5.8% to 5.0% over the same period. This resulted in earnings falling to $4.18 per share over the last twelve months, versus $4.35 per share in 2022.

What’s Behind Rising Valuation Multiple?

Investors have rewarded Alaska stock lately amid an improvement in profitability in the latest quarter. The company’s consolidated pre-tax margin of 10.7% in Q3 improved 390 bps y-o-y. Also, oil prices have cooled to $2.11 per gallon (Jet fuel) after rising to over $2.60 levels in July due to the geopolitical tensions in the Middle East. This bodes well for airline stocks at large, given that fuel accounts for over a quarter of operating expenses. Moreover, the Fed rate cuts bode well for Alaska, given it has a high debt to equity ratio of 75%, with total debt of $6.1 billion. Alaska’s profitability will improve with lower interest costs to bear. Also, the company’s recent outlook for 2027 is optimistic, with a 2.3x expected earnings growth between 2024 and 2027. Lastly, the overall travel demand remains robust, aiding the company’s overall revenue growth and inspiring investor confidence.

Does ALK Stock Have Any Room For Growth?

At its current levels of $63, ALK stock is up a solid 60% this year, and we think it has little room for growth now. But that was not the case in recent years. ALK has had a poor run, with the stock losing value in each of the last three years. Returns for the stock were 0% in 2021, -18% in 2022, and -9% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is less volatile. And it 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 around rate cuts and geopolitical conditions, could ALK stock see higher levels? We estimate Alaska Air’s Valuation to be $66 per share, reflecting only a 5% upside from its current levels of $63. Our forecast is based on 16x trailing adjusted earnings of $4.18 per share, slightly higher than the stock’s average P/E ratio of 15x over the last three years. We think a rise in valuation multiple for Alaska seems justified, given the company’s solid earnings outlook in the coming years.

While ALK stock looks like it has only a little room for growth, it is helpful to see how Alaska’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

[1] Returns as of 12/17/2024
[2] Cumulative total returns since the end of 2016

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