Should You Buy Or Avoid Alaska Air Stock At $52?

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ALK
Alaska Air

Alaska Air stock (NYSE: ALK) has gained a good 21% year-to-date, outperforming the broader S&P 500, up 14%. So what’s driving the recent surge in the stock? Airlines stocks, in general, have fared well this year, with inflation easing and the Federal Reserve moderating the pace of its interest rate hikes. Moreover, the travel demand has remained strong in recent quarters. Both passenger traffic and ticket yield have risen meaningfully in the last few years. For Alaska Air, passenger traffic rose a significant 2.5x between 2020 and 2022, while ticket yield grew 16% over this period.

However, due to higher fuel costs, the company’s pre-tax margins haven’t seen any meaningful growth. 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.

Alaska Air’s revenue was up a solid 31% to $2.2 billion in Q1’23, driven by a 14% rise in available seat miles (ASM) while revenue per available seat mile grew 15%. Its pre-tax margin improved slightly to -9.1% from -12.3% in the prior-year quarter. For the full-year 2023, the company expects its total revenue to rise between 2.5% and 5.5% and its pre-tax margin to be between 14% and 17%, implying margin expansion in the coming quarters. Alaska Air’s margin metric is partly being weighed down by the costs associated with the retirement of its Airbus fleet. Looking forward, the company is likely to have a better margin profile with lower costs associated with pilot training. Lastly, the concerns of a potential recession and weakening consumer spending environment have not impacted airlines, given the solid travel demand, a trend expected to continue, with consumers prioritizing travel spending over other areas.

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Now, should you buy or fear ALK stock at the current market price of about $52 per share? There are some tailwinds for the stock and ALK valuation at the current juncture appears attractive. ALK stock trades at about 0.7x sales, slightly ahead of its peers, including Delta and American Airlines. Still, it is lower than the company’s last three-year average of 1.2x sales. We estimate Alaska Air’s valuation at about $60 per share, which is 15% above the current market price. See our analysis on Buy Or Fear Alaska Air (ALK) Stock? for more details about what is driving the stock.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

 Returns Jun 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 ALK Return 16% 21% -41%
 S&P 500 Return 5% 14% 96%
 Trefis Multi-Strategy Portfolio 7% 17% 267%

[1] Month-to-date and year-to-date as of 6/28/2023
[2] Cumulative total returns since the end of 2016

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