Operational Clouds Have Opened Another Window At Alaska Air

Airlines in the U.S. have shown an uncommon level of discipline for the past decade, setting the stage for a nice boom period where most industry participants have been able to make some good money. Nothing that good lasts forever, though, and there are emerging signs that airlines are getting a little loose with capacity in the interests of competition.

With Alaska Air (ALK), there are concerns that go beyond that competitive industry backdrop. The integration of Virgin America (NASDAQ:VA) hasn't been completely smooth and it looks as though the company might be slipping a bit on much-vaunted metrics like cost control and customer experiences. All of that has led to a roughly one-third drop in the share price from its early 2017 peak and underperformance relative to some of its larger rivals.

I'm cautiously bullish on Alaska Air now. I'm bullish because I think modest growth can support a fair value in the $70s based upon both DCF and EBITDAR. I'm cautious because individual stocks don't often outperform when the entire sector goes into disfavor, and I think there could be some more bumps in the road as Virgin America is fully integrated and as rivals respond to the new, larger, more competitive Alaska Air.

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Operational Clouds Have Opened Another Window At Alaska Air

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

Seeking Alpha: Alaska Air Continues To Hold Its Own

Airlines are making the most of an atypical outbreak of sane, responsible management across the industry, and Alaska Air Group (NYSE:ALK) has certainly been among the beneficiaries. While the company has done pretty well for itself (and its shareholders) over the last few years, the stock has been a relative underperformer more recently on worries that Delta Air Lines' (NYSE:DAL) aggressive expansion into Seattle will start to impact the company's performance. Trading below industry-average multiples and doing better than the bears predicted, Alaska Air still appears to offer some upside but readers may want to note that the airline rally could be getting a little long in the tooth.

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Alaska Air Continues To Hold Its Own

Seeking Alpha: Alaska Air Looks To Withstand Healthier Rivals

The great story that is Alaska Air Group (ALK) has continued to roll on, with the stock racking up almost 60% gains over the past year. What makes Alaska Air special among the airlines isn't really a big mystery anymore - the company has limited itself to a somewhat narrow geographic focus, established a low cost base, and then leveraged good customer satisfaction into strong market share, good profitability, and an uncommonly strong balance sheet.

If there is a problem with top performers, it is in figuring out what more they can do to excel. To be sure, Delta (DAL) is putting some pressure on Alaska Air, as are JetBlue (JBLU) and Virgin America. Alaska Air has the option to expand its service into incremental markets, and that should be a positive for growth. These shares remain undervalued by conventional industry metrics, though, and I don't think the ride is going to be over soon.

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Alaska Air Looks To Withstand Healthier Rivals