As you start analyzing individual stocks as potential investing opportunities, one of the most logical steps to take is to analyze the stock’s industry. A strongly performing industry, more often than not should act as a positive catalyst to the stock you’re considering. In the same light, concerns about the industry can usually be expected to extend into pressure on the stock you’re thinking about that might limit how much upside there is to work with.
Negative pressure on an industry can come in a variety of forms. Problems found in some of the largest, most established companies in an industry or sector, for example, will sometimes bleed into smaller companies in the industry. A good example of this right now comes from the airline industry. Over the last few months, Boeing Co. (BA) has lost nearly 23% of its value as their top-selling jet, the 737 MAX has been grounded all over the world following two fatal crashes that killed all passengers. The cause was tied to a bug in the flight control system that erroneously forced the plane into a catastrophic dive. BA has been working to fix the bug, but until they can prove to regulators in the U.S. and abroad they have sufficiently addressed the issue, production of the 737 MAX remains on hold as most airlines have suspended, or even cancelled orders for the plane.
BA’s issues haven’t just affected its stock; airlines in general have encountered a fair bit of volatility as well, as many of the best-known airlines, including Southwest (LUV) and American Air Lines (AAL) have the plane taking up a significant portion of its available fleet. Global groundings means those carriers have had to cancel flights and scramble to find ways to compensate. Cancelled flights have, in many cases meant issuing refunds to passengers, so it isn’t all that surprising that many of the carriers with significant portions of its fleet made up of the MAX have started talking about concerns about the MAX in their earnings report.
The interesting thing is that while this is a problem that is affected the industry at large, there are still stocks that are showing good resilience, simply because they don’t have any MAX planes in their fleets. Call it luck if you like; but one example of what I mean is Alaska Air Lines (ALK). The sixth-largest U.S. carrier operates on a regional basis, and does have about 30 pending orders for the plane, but as of this writing has taken delivery on none of them. That may be the primary reason that the company’s price performance has belied BA concerns that have negatively impacted some of its bigger competitors; the stock is up about 20% since mid-March, and is in the midst of a nice upward trend. The company’s latest earnings report showed some impressive fundamental characteristics, which has been a positive for the stock’s strength since March, but still puts an interesting value opportunity on the table to consider.
Fundamental and Value Profile
Alaska Air Group, Inc. is the holding company of Alaska Airlines (Alaska), Virgin America Inc., Horizon Air (Horizon) and other business units. The Company operates through three segments: Mainline, Regional and Horizon. Its Mainline segment includes Alaska’s and Virgin America’s scheduled air transportation for passengers and cargo throughout the United States, and in parts of Canada, Mexico, Costa Rica and Cuba. Its Regional segment includes Horizon’s and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the United States under capacity purchased arrangements (CPAs). Its Horizon segment includes the capacity sold to Alaska under CPA. Alaska and Virgin America operate fleets of narrowbody passenger jets. As of December 31, 2016, it maintained two frequent flyer plans: the Alaska Airlines Mileage Plan and the Virgin America Elevate. ALK has a current market cap of about $7.9 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased nearly 31%, while revenues improved a little over 6%. The picture got even better in the last quarter, as earnings increased more than 1,100%, while sales nearly 22%. The company’s margin profile is an indication of increasing strength, as Net Income as a percentage of Revenues over the last twelve months was nearly 6%, and strengthened in the last quarter to 11.4%.
Free Cash Flow: ALK’s free cash flow is healthy, at $564 million over the last twelve months and that translates to a Free Cash Flow Yield of 7.13%.
Debt to Equity: ALK’s debt/equity ratio is conservative, at .75. As of the last quarter, the company reported almost $1.6 billion in cash and liquid assets against about $1.5 billion in long-term debt. Their healthy margin profile, and solid cash position means that operating profits are more than adequate to service the debt they have, while they also have good liquidity to provide additional flexibility.
Dividend: ALK’s annual divided is $1.40 per share, which translates to a yield of 2.18% at the stock’s current price. The dividend has also increased, from about $1.28 per share annually at the beginning of the year.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value. ALK has a Book Value of $32.14. That translates to a Price/Book value of 1.99, against a historical average Price/Book ratio of 3.24. That means that ALK is undervalued by almost 62%. That puts the stock’s long-term “fair value” target price at about $104 per share.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays ALK’s price performance over the last two years. The diagonal red line traces the stock’s downward trend from July 2017 to its low in March, and also serves as the baseline for the Fibonacci retracement lines on the right side of the chart. From the March low at around $53, the stock has formed a nice intermediate-term upward trend, only recently dropping back from resistance shown by the 38.2% retracement line at around $66 per share, but appears to be approaching upward trend support a little below $64. A push above $66 should give the stock good upside to test resistance somewhere between the 50% and 61.8% retracement lines at around $70, and $74 respectively. If current trend support is broken by a drop below $63.50, the stock could drop to somewhere between $58.50 and $59 before it finds new support to act as a new stabilization level.
Near-term Keys: ALK’s nice upward trend since March offers a good opportunity to think about a bullish short-term trade, with a break above $66 providing a good signal to buy the stock or work with call options with a short-term target at around $70, or $74 if the stock builds more upward momentum. A break below $63.50, however could also be an interesting signal to think about shorting the stock or to work with put options, with an eye on $58.50 as a closing point for a bearish trade. The stock’s fundamentals are solid, and the company’s limited exposure to broader industry tied to the 737 MAX is a positive that I think makes ALK an interesting stock to think about as a long-term, value-based opportunity.