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Alaska Air Group: Long Beyond The Clouds

|Includes: Alaska Air Group, Inc. (ALK)

Alaska Air Group Inc. (NYSE: ALK)

Transportation: Airline

Rating/Analyst Recommendation: Buy

Price (6 Jan 6, 15, US $): 58.77

Composite Target Price (US $): 97.57 (12-month)

Downside Risk/Holding Period: 6-9 months

52week price range: 36.31- 60.94

Market Cap (US$): 7.82B

Enterprise value (US$): 8.2B

Exhibit ALK-1

Alaska Air Group 5-Year Price Performance

Source: S&P Capital IQ

Business Summary

Alaska Air Group is the holding company of Alaska Airlines and Horizon Air Industries; together, they serve around 100 cities in all 50 United States, Canada, and Mexico. It's main hubs are on the West Coast, particularly the Pacific North West.

Fundamental Analysis Overview: Balance Sheet and Cash Flow: Competitive Analysis

  1. At 14.1x forward P/E, ALK's P/E ratio is lower than 77% of other companies in its industry.
  1. At 1.5x P/S, 3.63x P/B, and 7.31x P/Cash Flow Alaska Airlines is comparable with other companies in Airline industry, meaning investors are willing to pay the same amount for this level of relative value compared with Alaska's peers/ ( P/S is 1.52, P/B is 3.5, and P/CF is 7.1)
  1. Current ratio (1.02x), Quick Ratio (0.98x), Debt/Equity (0.37x), Debt/Assets (0.13x) ratios fall in the top 8% of its industry. This denotes that these financial markers would have a resultant less volatile effect on ALK's earnings n 2015.

P/E

101.4

P/S

89.15

P/B

99.25

P/CF

104.5

AVERAGE 98.58

Target Price and Methodology w/ assumptions

  1. Using 2014 Forward Multiples and Valuation estimates:
  1. Using Enterprise Valuation:

Enterprise Valuation

 

2015 E

 
 

Implied EV (billion)

8.4

 

EV/EBITDA

11.99

 

O/S (million)

132.06

     
 

Target Price

100.716

  1. Using DCF Modeling w/dynamic growth (assumptions included: 2% enterprise valuation growth, 11.1% WACC and 5.0% LT G%)

Exhibit ALK-2:

Discount Cash Flow Calculation Trial 2

Input Cells in Yellow

             
 

PV

CF

WACC

G%

LT G%

 

P/CF

   

5.00

11.0%

5.0%

5.0%

   

DCF w/ constant growth

70.22

         

7.8

Basic w/o 1/2 year adjmt

66.65

           
               
   

5.00

15.0%

 

8.0%

   

DCF w/ no annual growth

45.84

         

12.0

Basic w/o 1/2 year adjmt

42.75

           
               

Annualized Return

13.8%

           
               

DCF w/ dynamic growth

 

(93.40)

11.1%

10.5%

5.0%

 

7.7

1

3.68

3.88

         

2

3.66

4.29

         

3

3.64

4.74

         

4

3.62

5.24

         

5

3.60

5.78

         

6

3.58

6.39

         

7

3.56

7.06

         

8

3.54

7.80

         

9

3.53

8.62

         

10

60.98

165.76

         

DCF w/ dynamic growth

93.40

           
               
               

IRR for 9.5 yrs

10.4%

           
               

Mod. IRR for 9.5 yrs

9.6%

           
               

Implied Rate of Return from Jan 6 2015 closing price

59%

         

Rates of Return and 2015 Outlook

  1. Past Growth Rate (%): Sales: 1 year at 6.59% and 3 years at 8.89%. Net income: 1 year at 60.79% and 3 years at 26.75%.
  2. Ratio Analysis:

1 Year 3 Years

  1. For TTM, return on assets stood at 9.0%, return on equity stood at 29.50% return on investment stood at 12.33% (vs. ROE industry avg of 12.50% and ROI industry average of 8.58%). ALK's ROE shows that it is able to reinvest its earnings more efficiently than 90% of its competitors in the industry.
  2. 2015 guidance include: raising forward guidance after beating revenue and earnings per share estimates in Q1, cost savings due to much lower oil prices (since oil is the #1 cost, roughly at 75% of all operating costs, for the industry.
  3. Operating Leverage: Alaska's leverage is amongst the lowest in the industry (See Exhibit ALK-3); furthermore, it is one of few airlines that has an investment grade rating.

Exhibit ALK-3

Source: Company Filings, MarketRealist, January 2015

Key Catalysts and Special Events

  1. Oil: With oil under $50 a barrel, Alaska's operating costs are posed to reflect a total cost savings of up to 50%.
  2. Customer base/Air travel demand: Alaska has a loyal customer base, attractive loyalty program, the highest customer survey ratings in the industry, as well as a high percentage of high middle income leisure travels
  3. Lower ex-fuel unit cost: Street consensus is that ex-fuel unit costs will benefit from high level of capacity growth as well as improved passenger yields. Alaska is in a favorable position relative to its peers to spread fixed costs over a large number of available "seat miles"

Foreseeable Downside Risk

  1. Oil: In the unlikely event that oil prices rebound 40% or higher, to $80 a barrel or higher, Alaska's operating margins will likely be hurt, but due to time lag, this may not materialize on Alaska's balance sheet until mid 2016.
  2. Price sensitivity of leisure travel: Alaska has a high percentage of leisure travel passengers; since leisure travel is price sensitive, any income shock or economic shocks that affect leisure travels could lead to lower EPS and operating margins for Alaska, which could materialize in early 2016.

Exhibit ALK-4

Company Financials as of Dec 31. 2013

Source: SEC.gov, Company Filings, S&P 500 Capital IQ

Technicals

  1. MACD indicates Bullish trend
  2. Chart Pattern indicates a strong Upward Trend
  3. Relative strength is bullish.
  4. UP/Down Volume pattern indicates that the stock is under Accumulation
  5. 50-day and 200-day moving average is rising

Exhibit ALK-5

Price Analysis

MO Chg. (%)

6.3

Resistance

N/A

Support

N/A

SELL STOP

53.43

Volatility (%)

2.5

Position

90

ADRX

29

Exhibit ALK-5

Monthly Averages

MA

PRICE

%

Slope

10 day

58.57

103

UP

21 day

57.46

105

UP

50 day

55.35

109

UP

200 day

48.65

124

UP

Exhibit ALK-6

ALK YTD Performance with Bollinger Bands

Source: Google Finance

1

Disclosure: The author is long ALK.

Additional disclosure: Long options and will initiate long position in stock