How Profitable Is Alaska Air?

+43.52%
Upside
38.88
Market
55.79
Trefis
ALK: Alaska Air logo
ALK
Alaska Air

Alaska Air (NYSE: ALK) saw its net income surge by 300% y-o-y to $235 million in 2023. This can primarily be attributed to higher revenues, and lower fuel costs. Even if we look at a slightly longer term, the net margins have expanded. In this note, we discuss Alaska Air’s margin profile along with its stock performance lately. ALK stock has seen a decline of 20% from levels of $50 in early January 2021 to around $40 now, vs. an increase of about 45% for the S&P 500 over this 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 -9% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — 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 Industrials sector including GE, CAT, and RTX, and even for the megacap 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.

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 $56 per share, reflecting a 35% upside from its current levels of $41. Our forecast is based on a 12x P/E multiple for ALK and expected earnings of $4.53 on a per-share and adjusted basis for the full year 2024. The company expects its 2024 earnings to be in the range of $3.25 and $5.25.

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Alaska Air Has Seen Its Pretax And Net Income Margins Expand In Recent Years

Alaska Air’s reported operating income increased from $675 million in 2021 to $837 million in 2023. However, its operating margin declined from 10.9% to 8.0% over this period. Among major expense items, the company saw a 2x rise in total fuel expenses, despite it falling 1% y-o-y in 2023. Higher labor costs have also weighed on the overall margin expansion.

Looking at its adjusted pretax income, it surged to $782 million in 2023, versus a loss of $343 million in 2021. Its pretax profit margin expanded from -5.6% to 7.5% over this period. Along with the expansion of adjusted pretax income, the company saw its adjusted net income rise from $256 million in 2021 to $583 million in 2023. On an adjusted basis, net income margin has expanded from 4.1% in 2021 to 5.6% in 2023. This resulted in adjusted earnings surging from $2.02 to $4.53 on a per share and adjusted basis over the same period.

Looking at the previous quarter, the company saw its consolidated adjusted pre-tax margin plunge to -7% from -5.2% in the prior-year quarter. The margin contraction resulted in a net loss widening to $0.92 per-share, compared to $0.62 loss per share in the prior-year quarter. Alaska Air’s profitability was weighed down due to the grounding of Boeing 737 MAX aircraft earlier this year. There was an incident in which the cabin side panel detached midair on Alaska Air (Boeing 737 Max 9) flight 1282 on January 9, 2024. Following the incident, the Federal Aviation Administration grounded Boeing 737 Max 9 aircraft. The company inspected its fleet and the aircraft returned to service in February.

Alaska Air expects its full-year 2024 earnings to be in the range of $3.25 and $5.25 on a per share and adjusted basis, compared to $4.53 in 2023.  Given the robust travel demand, Alaska Air should be able to expand its margin profile in the coming years with a focus on better network connections to garner higher yields. For example, it recently relaunched a seasonal route between New York and Anchorage, and it has expanded its operations from Portland.

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.

Returns Jun 2024
MTD [1]
2024
YTD [1]
2017-24
Total [2]
 ALK Return 0% 7% -53%
 S&P 500 Return 3% 14% 143%
 Trefis Reinforced Value Portfolio 2% 6% 653%

[1] Returns as of 6/25/2024
[2] Cumulative total returns since the end of 2016

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