What Led To A 24% Fall In Alaska Air Stock Since 2020?

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Alaska Air

After an 18% fall month-to-date, at the current levels, Alaska Air stock (NYSE: ALK) looks undervalued, in our view. ALK stock fell from $48 in early March to $39 now. The MTD -18% return for ALK marks an underperformance with the broader S&P500 index, up 0%. The recent fall of ALK stock can partly be attributed to the company cutting its Q1 ’23 margin forecast due to higher fuel costs.

Looking at a slightly longer term, ALK stock is down 24% from levels seen in late 2020, compared to a 5% rise in the broader S&P500 index. This 24% fall for ALK can be attributed to 1. the company’s P/S ratio, which plunged 73% to 0.5x trailing revenues from 1.8x in 2020, partly offset by 2. Alaska Air’s Revenue, which grew a solid 170% to $9.6 billion over the last twelve months, compared to $3.6 billion in 2020, and 3. a 1.7% fall in its total shares outstanding to 122 million currently. Our dashboard – Why Alaska Air (ALK) Stock Moved – details the factors behind this move.

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The rise in Alaska Air revenues over the recent years can be attributed to a rebound in air travel demand, with passenger traffic and ticket yield rising meaningfully in the last few years. For perspective, passenger traffic rose a significant 2.5x between 2020 and 2022, while ticket yield grew 16% over this period. The demand for air travel is expected to remain high in the near term, boding well for Alaska Air. The company expects its total revenue to rise between 8% and 10% in 2023. We forecast the 2023 revenue to be around $10.6 billion, up 10% y-o-y, driven by higher passenger traffic.

However, the company’s pre-tax margins haven’t seen any meaningful growth due to rising fuel costs. The average Brent crude oil price rose 2.4x to $100.93 in 2022, compared to $41.96 in 2020. The economic fuel cost per gallon metric for Alaska Air also increased 116% to $3.42 in 2022 (vs. $1.58 in 2020). The company’s adjusted pre-tax margin rose from -49.1% in 2020 to 7.6% in 2022. The company expects this metric to be between 9% and 12% for the full-year 2023. That said, it has cut its Q1 ’23 guidance with pre-tax margin now expected to be between -6% and -3% vs. its prior guidance of -4% and -1%.

Looking at valuation, ALK stock looks undervalued after its recent fall. At its current level of $39, ALK is trading at 0.5x trailing revenues compared to its last three-year average of 1.2x. Our Alaska Air (ALK) Valuation Ratios Comparison has more details. We estimate Alaska Air’s Valuation to be around $55 per share, about 40% above the current market price of $39.

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.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised at how counter-intuitive the stock valuation is for Cintas vs. Merck.

With inflation rising and the Fed raising interest rates, among other factors, ALK stock has fallen 27% in the last twelve months. Can it drop more? See how low Alaska Air stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Mar 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 ALK Return -18% -9% -56%
 S&P 500 Return 0% 3% 77%
 Trefis Multi-Strategy Portfolio -3% 3% 226%

[1] Month-to-date and year-to-date as of 3/21/2023
[2] Cumulative total returns since the end of 2016

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