Airlines Stocks

Alaska Air Group Inc Valuation – February 2019 $ALK

Company Profile (excerpt from Reuters): Alaska Air Group, Inc., incorporated on March 15, 1985, 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. Horizon operates a fleet of turboprop aircraft and sells all of its capacity to Alaska pursuant to a CPA.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of ALK – February 2019

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

 

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $7,682,438,587 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.61 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
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 210.23% Pass
6. Moderate PEmg Ratio PEmg < 20 10.79 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 2.07 Pass
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 0.61 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -1.40 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

EPSmg $5.78
MG Growth Estimate 4.34%
MG Value $99.39
Opinion Undervalued
MG Grade B-
MG Value based on 3% Growth $83.87
MG Value based on 0% Growth $49.16
Market Implied Growth Rate 1.14%
Current Price $62.40
% of Intrinsic Value 62.78%

Alaska Air Group, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, poor dividend history. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Undervalued after growing its EPSmg (normalized earnings) from $4.49 in 2015 to an estimated $5.78 for 2019. This level of demonstrated earnings growth outpaces the market’s implied estimate of 1.14% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value above the price.

At the time of valuation, further research into Alaska Air Group, Inc. revealed the company was trading below its Graham Number of $64.14. The company pays a dividend of $1.28 per share, for a yield of 2.1%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 10.79, which was below the industry average of 10.79. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-43.17.

Alaska Air Group, Inc. performs fairly well in the ModernGraham grading system, scoring a B-.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$43.17
Graham Number $64.14
PEmg 10.79
Current Ratio 0.61
PB Ratio 2.07
Current Dividend $1.28
Dividend Yield 2.05%
Number of Consecutive Years of Dividend Growth 6

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Most Recent Balance Sheet Figures

Balance Sheet Information 12/1/2018
Total Current Assets $1,787,000,000
Total Current Liabilities $2,942,000,000
Long-Term Debt $1,617,000,000
Total Assets $10,912,000,000
Intangible Assets $2,070,000,000
Total Liabilities $7,161,000,000
Shares Outstanding (Diluted Average) 124,488,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $6.01
Dec2018 $3.52
Dec2017 $7.75
Dec2016 $6.41
Dec2015 $6.56
Dec2014 $4.42
Dec2013 $3.58
Dec2012 $2.20
Dec2011 $1.67
Dec2010 $1.71
Dec2009 $0.84
Dec2008 -$0.94
Dec2007 $0.77
Dec2006 -$0.35
Dec2005 -$0.05
Dec2004 -$0.14
Dec2003 $0.13
Dec2002 -$1.12
Dec2001 -$0.41
Dec2000 -$0.64
Dec1999 $1.27

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $5.78
Dec2018 $5.69
Dec2017 $6.43
Dec2016 $5.39
Dec2015 $4.49
Dec2014 $3.20
Dec2013 $2.40
Dec2012 $1.57
Dec2011 $1.10
Dec2010 $0.68
Dec2009 $0.13
Dec2008 -$0.19
Dec2007 $0.14
Dec2006 -$0.22
Dec2005 -$0.21
Dec2004 -$0.33
Dec2003 -$0.34

Recommended Reading:

Other ModernGraham posts about the company

Alaska Air Group Inc Valuation – May 2018 $ALK
8 Best Stocks for Value Investors This Week – 12/27/16
Alaska Air Group Inc Valuation – December 2016 $ALK
Alaska Air Group Inc. Analysis – Initial Coverage $ALK

Other ModernGraham posts about related companies

Delta Air Lines Inc Valuation – January 2019 $DAL
United Continental Holdings Inc Valuation – January 2019 $UAL
JetBlue Airways Corp Valuation – August 2018 $JBLU
SkyWest Inc Valuation – July 2018 $SKYW
American Airlines Group Inc Valuation – May 2018 $AAL
Southwest Airlines Co Valuation – May 2018 $LUV
Alaska Air Group Inc Valuation – May 2018 $ALK
Delta Air Lines Inc Valuation – March 2018 $DAL
United Continental Holdings Inc Valuation – Initial Coverage $UAL
American Airlines Group Inc Valuation – February 2017 $AAL

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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