Should The Rally Continue In Alaska Air Group Stock?

ALK: Alaska Air logo
Alaska Air

The shares of Alaska Air Group (NYSE: ALK) have rallied 20% in the past month reaching the pre-Covid level as the U.S. government granted a second round of payroll support to airlines. Interestingly, the shares of popular online travel company Expedia (NASDAQ: EXPE) have shot beyond February 2020 highs despite the near-term lull in travel demand. Does this indicate a buying opportunity in ALK stock? Given the recently published travel outlook by Expedia, air travel is expected to boom later during the year with the young population (Millennials and Gen Z) traveling the most. Trefis compares the historical stock price trends between airline stocks and Expedia in an interactive dashboard analysis, ALK Stock Has 53% Chance Of A Rise Over The Next Month After Rising 11% In The Last 5

Airline and OTA stocks have outperformed broader markets this year

In the past 21 days, Alaska Air, JetBlue, and Spirit Airlines stocks have gained 16%, 21%, and 33%, respectively – fairly in-line with the 16% rally observed in EXPE stock. Looking at the past five-day and ten-day performance, the rally seems to be growing stronger despite a stagnation observed in broader markets. Per annual filings, Alaska Air and Expedia observed a similar 60% (y-o-y) contraction in their top line as travel demand fell to multi-year lows due to the pandemic.

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Does the rally in EXPE indicate a buying opportunity in ALK?

With companies implementing cost control and cash preservation measures, the ratio of operating cash outflow and market capitalization can be considered as a measure of operational efficiency. Alaska Air burned $1 billion (operating cash outflow) in 2020 (excluding the impact of payroll support) and its current market capitalization stands at $7.9 billion. Similarly, Expedia burned $3.8 billion (operating cash outflow) and its current market capitalization stands at $23 billion. ALK and EXPE’s cash burn to market capitalization ratio is 12.6% and 16.5%, respectively.

By achieving a similar level of operational efficiency during the pandemic, a strong rally in one creates a price discontinuity in the other. Therefore, we believe that ALK stock has room for more growth largely due to stringent cost control measures, ongoing government support, and expectations of a quick rebound in travel demand.

As the slump in travel demand continues to weigh on the hospitality sector, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Expeditors International vs. LGI Homes shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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