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Just about a year ago, I wrote about Alaska Air Group and concluded that it was fairly valued. At the time I held a long position in ALK and I still do today. In the past 52 weeks, the share price has appreciated 77%. I believe ALK remains undervalued and still has significant upside potential.

Calendar year 2012 was a good year for Alaska Air with EPS diluted growing 31.7% to $4.40 on revenues of $4,657.0 million. EPS growth has slowed from its three-year average of 37.8% but remains above the five-year average of 23.4%. Similarly, sales growth declined to 7.9% on the year from the three-year average of 11.1% but also remains above the five-year average growth rate of 5.8%. The consensus EPS estimate for 2013 is $5.55 and the consensus revenue estimate is $5,025.25 million.

The company is doing well and is expanding both its fleet and adding destinations. In a press release, ALK announced it has signed an agreement with Boeing to purchase 50 additional aircraft. Among the new routes is service between San Diego and Orlando, San Diego to Boston and Seattle to Salt Lake City. In all, the company has opened 21 new routes.

In the same press release, Alaska Air announced six-year agreements with the International Brotherhood of Teamsters representing Horizon pilots and the International Association of Machinists and Aerospace Workers representing ramp and store employees.

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Relative to the industry medians, the company compares very well on the basis of margins. ALK is also more profitable than the industry median when using both earnings- and cash-based metrics.

Alaska Air does not pay a dividend. However, it has used its free cash flow to purchase stock. It has reduced the number of shares outstanding by about 2.0% in the past year and the five-year average buyback has been about 2.4%.

Alaska Air is something of a niche player in the industry. Its primary market is the West Coast where it enjoys a near monopoly on service between Seattle and Alaska. Last month, Barron's published a very favorable article on the company.

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Between the company's history of growth and profitability and its place in the market, I think ALK can appreciate another 35%. The share buyback program and strong free cash flow all support this opportunity.

Source: Alaska Air Group Still Undervalued