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Risk-adverse entrepreneurs do not start airlines, and risk-adverse investors do not invest in them. In the past 52 weeks, the median decline in airline stocks is 16.00%, while the mean decline in prices is 20.68%. Not all airlines have declined in value, of course. One standout is Alaska Air (ALK). The share price of ALK has appreciated about 14.0% over the past 52-week period.

Alaska Air Group, Inc. is the holding company for Alaska Airlines and Horizon Air, both Seattle-based carriers that collectively serve over 90 destinations in the United States, Canada, and Mexico. Alaska Air Group was organized as a Delaware corporation in 1985. For the year ending December 2011, Alaska Air flew approximately 24 million passengers to about 100 destinations.

All airlines operate with two swords hanging over their heads: rising costs, especially volatile fuel prices, and demand which is tied to economic conditions. So far, ALK has confronted both issues with some success. In spite of rising fuel prices, it has managed to contain other costs. It also maintains good labor relations, minimizing demands.

The company split its stock 2:1 this month. The company also announced a stock repurchase plan of up to $50 million of its common stock over the next year. ALK intends to pay for the repurchased stock from cash flow.

Each quarter of FY11 saw year-over-year revenue increases. The fourth quarter revenue increase was a respectable 9.0%. For the year, revenue increased 12.7%. On the other hand, EPS was either down or flat when compared to the prior year quarter. EPS for FY11 was down 2.1% from the prior fiscal year. Analysts are optimistic for FY12. They forecast EPS in the range of $4.10 to $5.14 and the consensus is $4.56. These same analysts see revenues growing to $4,589.4 million to $4,713.4 million, with an average of $4,656.72. Using the consensus FY12 revenue projection, sales are expected to rise about 7.8% this year.

Gross margin, at 28.2% is above the five-year average of 24.7% and operating margin, at 10.4%, is above its five-year average of 6.4%. Return on Invested Capital, arguable the most important of the profitability ratios, is 12.1% and well above the five-year average of 6.6%. By contrast, the median ROIC for the airline industry in 2011 is 7.75% and the 5-year average is 5.0%.

The company carries a heavy debt load, but one that seems manageable at less than 2x free cash flow. The Long Term Debt to Total Capital is less than the industry median as is Long Term Debt to Equity.

Alaska Air has had a terrific run these last few years. Its share price is up 587% since it hit its low in 2008 and is up 35.8% from the 52-week low. This begs the question of how much further can ALK run? Analysts provide estimates with a range of $37.50 to $58.00. The median estimate is $44 and the average is $44.83. One analyst, Stephen Simpson, speculated that ALK might be worth $80 or even more.

Our own estimates are much more conservative. We place a great deal of emphasis on a company's balance sheet strength. In the case of Alaska Air, we see reason to be cautious. We think that ALK is trading close to our fair value estimate of $38.60.

Source: Flying High With Alaska Air