Alaska Air Doing Its Part, But Investors Seem More Nervous About Airlines

Alaska Air (ALK) did its part, and a little more, for the fourth quarter, and guidance for 2019 looked fine, but I suspect investors didn't like management's comments about recent volatility in fares, and I think concerns related to the ongoing government shutdown are playing into the stock as well. While I do believe Alaska Air is undervalued and well-positioned to generate above-average growth in 2019 as it leverages the benefits of the Virgin deal and pursues some new ancillary revenue opportunities, a weaker economy and a more competitive airline sector loom as risks, and investors shouldn't underestimate the challenge it can be to outperform a weaker sector.

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Alaska Air Doing Its Part, But Investors Seem More Nervous About Airlines

After A Year Of Heavy Lifting, Alaska Air Looks To Get Back To Business

This was a challenging, and likely frustrating, year for Alaska Air (ALK) management, as the company still had a lot of the heavy lifting to do in integrating the Virgin acquisition, but didn’t really get to see the benefits yet. At the same time, competitive actions from other airlines like Delta (DAL), United (UAL), and Southwest (LUV) have made managing capacity in the company’s key West Coast markets a little more challenging. All told, then, it’s been a challenging year for the stock (down about 15%), though Alaska Air has fared better than the sector as a whole.

I was lukewarm on Alaska Air back in June mostly due to sentiment and the risk of further negative earnings revisions. The shares are down slightly since then, while EBITDA expectations have fallen about 10%. I believe that sets the stage for a better 2019, and I believe Alaska Air is poised to generate some of the best growth in earnings spread (the difference between RASM, or revenue per available seat mile, and CASM, or cost per available seat mile) in the sector, as Alaska Air gets back to its normal operating prerogatives. A weaker economy and a less disciplined sector are still threats, but I believe Alaska Air should be trading in the $70s today.

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After A Year Of Heavy Lifting, Alaska Air Looks To Get Back To Business

Alaska Air Fighting Some Competitive Headwinds

I described myself as “cautiously bullish” on Alaska Air (NYSE:ALK) earlier this year, as I was concerned that the generally positive long-term outlook for this well-run airline could be overshadowed by near-term cost/synergy and competitive capacity worries, not to mention overall late-cycle weakness in airlines. Shares have lost a little ground since then, more or less keeping pace with Delta Air Lines (NYSE:DAL) and bracketed by Southwest (NYSE:LUV) and JetBlue (NASDAQ:JBLU) on the weaker end and United (NYSE:UAL) on the better-performing end.

My basic outlook on Alaska Air really hasn’t changed that much. Higher labor costs and fuel costs are a drag on results, but management seems to be switching back to a network optimization footing, and history suggests that will generate some positive results for shareholders. I’ve been concerned for a little while that a prolonged stretch of good behavior from airlines would eventually end, and I think that may be happening now with capacity growth along the West Coast. Even so, I think low-to-mid single digit growth from Alaska Air can support a fair value above $70 and double-digit total annualized returns from here.

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Alaska Air Fighting Some Competitive Headwinds

Seeking Alpha: Alaska Air Making The Most Of Its Opportunities

I hate avoiding the shares of really good companies just because they look a little pricey, and Alaska Air Group (NYSE:ALK) is a good example of why that is. I liked the company back in February and thought that the shares had upside into the $70s, but the stock has managed to touch the high $80s this year and sits more than 25% higher than when I wrote that last article. Since that time, Alaska Air has continued to compete very effectively - not only withstanding Delta Air Lines' (NYSE:DAL) aggressive expansion in Seattle, but also adding several new routes of its own and leveraging its cost advantages.

And now we come back to the perpetual issue with Alaska Air's shares - valuation. At a 5.5x multiple to EBITDAR, the shares are about fairly valued, while a 6x multiple (still within the bounds of normal for an airline) adds about $8/share to the fair value and bumps the undervaluation up over 10%. Looking at free cash flow, today's price seems to be pricing in mid-to-high single-digit annualized FCF growth from 2015's estimated end point, and that's pretty generous for an airline.

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Alaska Air Making The Most Of Its Opportunities

Investopedia: A Great Model And Growing Markets Powering Copa Holdings

This year has turned into a challenging one for emerging market investors, as China remains weak (at least relatively so), Brazil and Mexico seem to be turning in the wrong direction, and multiple Southeast Asian markets sell off on macroeconomic worries. Even so, business continues on at Copa Holdings (NYSE:CPA), where a strong and savvy business plan has led this Latin American airline to not only strong margins and good growth, but solid prospects for the coming years.

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http://www.investopedia.com/stock-analysis/090313/great-model-and-growing-markets-powering-copa-holdings-cpa-lfl-gol-luv.aspx

Investopedia: Alaska Air Almost Too Good To Be True

Airlines have built a well-deserved reputation for being terrible investments. Not only does the industry have high ongoing capital demands, but a tradition of beggar-thy-neighbor operating philosophies that lead to cut-throat pricing and minimal (if not negative) real returns across the industry.

And then there's Alaska Air (NYSE:ALK). This is an unusual airline in so many ways. Although it covers a huge geographic footprint (from Alaska to Hawaii to the continental U.S. to Mexico), it's relatively focused in terms of airports and routes served. In an industry where customer loathing is palpable and employee-employer relations harken back to the French Revolution, Alaska Air seems to actually be well-liked by both fliers and those doing/supporting the flying.


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Investopedia: AMR's Attempt To Avoid Bankruptcy Stalls Out

With quite a lot of debt, thinning liquidity, untenable costs and a worsening global economic outlook for 2012, AMR (NYSE:AMR), parent of American Airlines, bowed to the inevitable and filed for Chapter 11 bankruptcy. At this point there is virtually no chance that the company will disappear or liquidate (it doesn't even believe it needs debtor-in-possession financing), but common shareholders are almost certain to take a total wipeout here. Although a new and improved AMR will likely emerge from this process, it is yet another reminder that airlines are miserable investments in most cases.

A Surprising Filing
There have been rumors about a potential AMR bankruptcy for some time now, and as labor negotiations dragged on it seemed increasingly possible that management would use Chapter 11 reorganization as its final bit of leverage. That said, this filing is still something of a surprise - Bank of America's analyst Glenn Engel was in print just two weeks saying that bankruptcy was not imminent here, and both Morgan Stanley and Barclays had positive ratings on the stock - including an $8 price target at Barclays. (For related reading, An Overview Of Corporate Bankruptcy.)

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Investopedia: AMR - No Bankruptcy Today ... Yet

"The rule is, jam to-morrow and jam yesterday-but never jam to-day." Carroll, Lewis. "Through The Looking Glass"

Airlines are lousy businesses. Even heralded success like Southwest Airlines (NYSE:LUV) and Ryanair (Nasdaq:RYAAY) have plateaued in recent years, and the airline industry has bedeviled otherwise successful investors like Warren Buffett. Now, with rumors swirling around about financial difficulties at AMR (NYSE:AMR), the financial health of the industry is getting another skeptical look from the market.

The Latest Troubles 

AMR, better known as American Airlines, actually has a relatively rare distinction to its credit. This is one of the few airlines that has not gone bankrupt. Still, with the company seemingly left out in the cold in the merger wave, that saw Northwest absorbed into Delta Air Lines (NYSE:DAL) and the merger of United and Continental into United Continental (NYSE:UAL), there have been worries for some time now that the company would struggle to compete. 

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http://stocks.investopedia.com/stock-analysis/2011/AMR--No-Bankruptcy-Today--Yet-AMR-LUV-DAL-UAL-LCC-ALK-RYAAY-BA1006.aspx

Investopedia: Atlas Air Flying Higher Now

Whether it is trains, planes or trucks, these are generally good days to be in the business of moving freight. As one of the larger players, Atlas Air Worldwide (Nasdaq:AAWW) continues to benefit from a healthier overall economic environment and healthier demand for airfreight services.

The Quarter That Was
By almost every measure, Atlas ended the year on a solid note or at least did so relative to expectations. Operating revenue grew 12% in the quarter as the company's total block hours increased by 11.3%. This growth was lumpy, though, as the ACMI business saw hours increase more than 18%, while the AMC charter and commercial charter businesses were down by mid-single-digit percentages. In other words, while the company is seeing less business shuttling equipment for the U.S. military, its "core" business is growing strongly.

Although revenue is growing nicely and the company is seeing customers fly above minimum contract levels, it's not all great news. The company has been transitioning away from military and spot market airfreight business, but those lines can be very profitable in peak times (when the U.S. government needs to get equipment to war zones, they do not hold out for the best possible price).

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http://stocks.investopedia.com/stock-analysis/2011/Atlas-Air-Flying-Higher-Now-AAWW-UAL-LUV-ODFL-UNP-FDX-UPS0217.aspx

FinancialEdge: What Is Great Management Worth?

In some respects, corporate management seems to be a bit like the weather - everybody talks about it and everybody agrees it's important, but nobody can ever seem to quite figure it all out. More to the point, only a momentum investor or chartist would likely even try to claim that management does not matter when assessing a stock merit's. Yet even value hounds have a hard time assigning value to management, or even proposing how such a thing could be measured. (For more, see Putting Management Under The Microscope.)

Great Management Sees the Future
In 1998, Finland's Nokia (NYSE:NOK) was the world's largest cell phone maker and Apple (Nasdaq:AAPL) was struggling to right itself just over a year into Steve Jobs' return to the company. While Apple developed breakaway winners like the iPod and the iPhone, Nokia introduced lead balloons like the N-Gage. Worse still, Nokia seemed to make the decision to play it safe and follow the market instead of looking out ahead of the curve and anticipating what customers would want. As a result, while Nokia is still the largest phone company in the world, Apple has jumped ahead both in revenue and in how much investors will pay for that revenue (Apple is over nine times larger in terms of enterprise value).

This is relatively common occurrence in business, and a major axis around which management value revolves. It is incredibly difficult to succeed by forever playing catch-up or hoping to take an already proven idea and execute it just a little bit better. The CEOs of companies like Microsoft (Nasdaq:MSFT), Intel (Nasdaq:INTC), Wal-Mart (NYSE:WMT) and Nike (NYSE:NKE) saw a future that other CEOs could not see and they positioned their companies accordingly - building billions in shareholder value along the way.

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Financial Edge - Why There Are Always Stocks Worth Owning

Buy and hold? Sell in May and go away? Bull market, bear market or lambs-to-the-abattoir market?

You will find no shortage of financial commentators trying to scare you out of the market and out of your holdings. Their advice often comes with the candy coating that "they are just trying to help you avoid losses", but there is poison within the message. Sure, it is painful to see your investments decline in value and there is rarely any good reason to hang on to a failed idea, but if you worry too much about trying to time the market, you will sell yourself out of any chance of reaping long-term gains. (For related reading, check out 4 Ways To Weather An Economic Storm.)

In other words, no matter what the economy looks like, there are always stocks worth owning.
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FinancialEdge - Biggest Corporate Comebacks

With Apple (Nasdaq:AAPL) recently supplanting Microsoft (Nasdaq:MSFT) as the most valuable tech company in the world, there is no doubt that it is one of the most remarkable turnarounds in U.S. corporate history. From a foundering company teetering on the edge of irrelevance, Apple has become one of the most innovative consumer-focused technology companies.


Apple is not alone, though. Many other corporations have danced on the brink of collapse and found their way back. Here we take a look at some other well-known major companies that had their flirtations with trouble and came back stronger than ever.


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http://financialedge.investopedia.com/financial-edge/0610/Biggest-Corporate-Comebacks.aspx