Alaska Air (NYSE: ALK) recently reported its Q3 results, with revenues and earnings falling below the street estimates. The company reported revenue of $2.8 billion, reflecting no growth from the prior year period and below the $2.9 billion street estimate. Its adjusted earnings of $1.83 per share were down 28% y-o-y and below the consensus estimate of $1.86 per share. In this note, we discuss Alaska Air’s stock performance, key takeaways from its recent results, and valuation.
ALK stock has suffered a sharp decline of 40% from levels of $50 in early January 2021 to around $30 now, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. 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 -24% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 12% in 2023 (YTD) – 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 industrial sector, including UPS, CAT, and UNP, and even for the mega-cap 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.
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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 recovery? From a valuation perspective, ALK stock looks attractive and will likely see higher levels over time. We estimate Alaska Air’s Valuation to be $47 per share, reflecting over 45% upside from its current levels of $32. Our forecast is based on a 10x P/E multiple for ALK and expected earnings of $4.75 on a per-share and adjusted basis for the full year 2023. The company lowered its earnings outlook to now be in the range of $4.25 and $4.75 (vs. the $5.50 and $7.50 range earlier).
Alaska Air’s revenue of $2.8 billion in Q3 was flat y-o-y. The company reported a 14% rise in available seat miles, while the load factor was down 190 bps, and yield also declined 10%, weighing on the overall top-line growth. The company saw its adjusted pre-tax margin plunge to 11.4% from 15.6% in the prior-year quarter. It expects the metric to fall between 7% and 8% for the full year 2023. Rising fuel prices will likely weigh on the company’s bottom line in the near-term. Flat revenues and margin contraction led to a 28% y-o-y fall in the bottom line to $1.83 on a per-share and adjusted basis in Q3’23.
ALK stock looks attractive at $32, trading at just 0.4x sales, compared to the last five-year average of 1.1x We believe investors will likely be better off picking ALK after its recent fall for robust gains in the long run. However, rising fuel prices and falling yields remain key risk factors in realizing these gains.
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.
|S&P 500 Return||0%||11%||91%|
|Trefis Reinforced Value Portfolio||-1%||22%||528%|
 Month-to-date and year-to-date as of 10/20/2023
 Cumulative total returns since the end of 2016