Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Most Undervalued Companies for the Defensive Investor – July 2015.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a stock analysis showing a specific look at how Alaska Air Group Inc. (ALK)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance): Alaska Air Group, Inc. is a holding company of Alaska Airlines Inc. (Alaska) and Horizon Air Industries Inc. (Horizon). The Company operates Alaska Airlines and Horizon Air airlines, which together with its partner regional airlines serve approximately 100 cities through a network in Alaska, the Lower 48, Hawaii, Canada and Mexico. The Company operates in three segments: Alaska Mainline, Alaska Regional and Horizon. Alaska Mainline is the Boeing 737 part of Alaska’s business. Alaska Regional is Alaska’s shorter distance network. Horizon operates regional aircraft. In 2014, the Company carried approximately 29 million passengers. Alaska operates a fleet of passenger jets (mainline) and contracts with Horizon SkyWest Airlines Inc. (SkyWest) and Peninsula Airways, Inc. (PenAir) for regional capacity under which Alaska receives all passenger revenue from those flights. Horizon operates a fleet of turboprop aircraft and sells all of its capacity to Alaska.
Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Here is aÂ free sample valuation pdf, and here is a post detailing what can be found within each individual company’s valuation.
Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Fail|
|4. Dividend Record||Dividend Payments for 10 years prior||Fail|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||Pass|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||Fail|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||15.00%|
|MG Value based on 3% Growth||$61.66|
|MG Value based on 0% Growth||$36.14|
|Market Implied Growth Rate||5.09%|
|% of Intrinsic Value||48.53%|
Alaska Air GroupÂ Inc.Â is not suitable for the more conservative Defensive Investor orÂ the Enterprising Investor. Â The Defensive Investor is concerned with the low current ratio, the insufficient earnings stability or growth over the last ten years, the short dividend history, and high PB ratio. Â The Enterprising Investor is concerned by the level of debt relative to the current assets. Â As a result, all value investorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a cautious speculative attitude.
As for a valuation,Â the company appears to be undervalued after growingÂ itsÂ EPSmg (normalized earnings) from $1.11 in 2011 to an estimated $4.25 for 2015. Â This level of demonstrated earnings growth outpacesÂ the market’s implied estimate of 5.09% annual earnings growth over the next 7-10 years.Â As a result, the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value aboveÂ the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Alaska Air Group Inc. (ALK)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$20.01|
|Number of Consecutive Years of Dividend Growth||3|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Total Current Assets||$1,654,000,000|
|Total Current Liabilities||$1,927,000,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$5.86|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$4.25|
Other ModernGraham posts about the company
Other ModernGraham posts about related companies
|American Airlines Group Analysis â€“ 2015 Initial Coverage $AAL|
|Delta Air Lines Inc. Annual Valuation â€“ 2015 $DAL|
|Southwest Airlines Company Annual Valuation â€“ 2014 $LUV|
The author did not hold aÂ position in any company mentioned in this articleÂ at the time of publication and had no intention of changing that position within the next 72 hours. Â This is not investment advice and all readers should speak with a registered investment adviser prior to making any investment decision. Â ModernGrahamÂ is not affiliated with the company in any manner.