Alaska Air Stock Soars After Optimistic Q4 Earnings Outlook

Alaska Air stock (NYSE: ALK) has surged nearly 20% this month following the company’s upgraded Q4 expectations. Alaska now anticipates earnings between $0.40 and $0.50 per share, an increase from the previous forecast of $0.20 to $0.40. The stock is also buoyed by the recent acquisition of Hawaiian Airlines. Furthermore, the company launched the “Alaska Accelerate” program, targeting $500 million in cost savings, $1 billion in additional profits, and at least $10 per share in earnings by 2027.

Significant Stock Performance Over Time

Alaska’s stock has increased by 48%, rising from $43 in early 2023 to $63 today. This change is linked to two key factors:

1. a 54% rise in the company’s trailing P/E ratio from 10x in 2022 to 15x currently, which is somewhat offset by
2. a 4% drop in adjusted earnings, decreasing from $4.35 in 2022 to $4.18 today.

Challenges to Earnings Growth

While Alaska saw a revenue increase from $9.6 billion in 2022 to $10.8 billion now, earnings fell by 4% due to shrinking margins. The airline industry rebounded strongly post-pandemic, with Alaska expanding its capacity by 16%, moving from 60.8 billion to 70.5 billion available seat miles since 2021. However, a decline in occupancy rates and lower fare yields have negatively impacted profitability.

As revenue climbed, adjusted net margins shrank from 5.8% to 5.0%. Consequently, earnings slid to $4.18 per share over the past year compared to $4.35 in 2022.

Reasons for Increased Valuation Multiple

Investors have recently favored Alaska stock due to improved profitability in the latest quarter, with a consolidated pre-tax margin of 10.7% in Q3, up 390 basis points year-over-year. A significant drop in oil prices, with jet fuel now at $2.11 per gallon after peaking at over $2.60 in July, is also beneficial, as fuel costs make up more than 25% of airline operating expenses. Additionally, anticipated Federal Reserve rate cuts should improve Alaska’s financial situation, given its high debt-to-equity ratio of 75% and total liabilities of $6.1 billion. A reduction in interest costs can enhance profitability. Furthermore, the company expects earnings to grow 2.3x from 2024 to 2027, with strong travel demand supporting revenue growth.

Potential for Future Growth in ALK Stock

Currently priced at $63, ALK shares have increased 60% this year, but the potential for significant growth appears limited. Alaska’s recent stock performance has been mixed, with returns of 0% in 2021, -18% in 2022, and -9% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, which consists of 30 carefully selected stocks, has consistently outperformed the S&P 500 with lower volatility.

In light of the uncertain macroeconomic environment characterized by potential rate cuts and geopolitical instability, ALK’s stock might not experience significant jumps. Our assessment places Alaska Air’s valuation at $66 per share, suggesting only a 5% upside from its current trading price. This projection is based on a P/E ratio of 16x trailing adjusted earnings of $4.18, slightly above its 15x average from the past three years, justified by promising earnings forecasts.

Comparing Alaska Air with Peers

Although ALK may have limited immediate growth potential, it’s valuable to compare its metrics with those of its industry peers. For detailed comparisons, check our Peer Comparisons.

[1] Returns as of 12/17/2024
[2] Cumulative total returns since the end of 2016

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.