So I've seen a few post lately mentioning airlines around here and the other stock reddits and thought id share my brief pitch of going long on ALK from my reddit. Hopefully itll give yall something to consider.
Alaska Air Group Inc
Alaska Air Lines
NYSE:ALK
MktCp: 7.8B
Core Business: Alaska Air Group owns and operates Alaska Airlines, Virgin America, Horizon, McGee Air Services and some other smaller units. However I will focus on Alaska Airlines with consideration to the Virgin America acquisition since those are the biggest sources of revenue for the company. Most of their business comes from flights that transport customers to and from West coast destinations. However a significant percentage of their customers are connecting flights from West to Midwest/Atlantic
Valuation: Air Lines can be very tricky to put a price on. The business is very competitive and heavy on capital expenditures. Profit margins are consistently being brought down due to price matching other airlines. They naturally trade at low PE ratios. And historically have been value traps for investors. Therefore I proceed even more conservative than usual when constructing a DCF for this company. I assume that its free cash flow will grow 4% on average for 5 years then reach terminal growth at 3 percent. This means some years it may lose fcf and others gain more than 4% but I assume it will average out to 4% yearly for the next five years. Using this I calculated a fair value of $118 per share. If my valuation is correct, ALK is very significantly undervalued.
Competitive Advantage: The commercial air line industry is all centered around offering the cheapest flights for customers and having small margins. Competitive advantages are usually either A) Niche Location or B) Brand Strength. I believe ALK has a strong case for both of these. The have a very significant presence in the West Coast having main flights going to Seattle to LA to Hawaii, even Costa Rica. The acquisition of Virgin America(although bad in the short term, more about it in risk section) will give them a greater share of the market in the region over the long term. Alaska Airlines has some of the best customer service and attention. They have had the highest customer satisfaction rate among airlines for 11 years straight(JD Power) and notable recent awards include best rewards program(Flyer talk 18), number 1 US Airline(Money 18),number 1 in Airline Quality Rating 2018, and ICCT Most fuel efficient Airline (2010-2017). I know some of these awards can be consider biased and some will say politics are involved but if you look at direct customer reviews of ALK and compare them to other regional airlines, its easy to tell that they have great customer satisfaction and its a priority to their business. To conclude I see ALK being a major player in a major market with an Amazon like focus on customer satisfactions.
Risks: Believe it or not, competition is not the biggest risk to Alaska Airlines. Oil prices and a recession are the biggest risks to Alaska Airlines as well as the airline industry. Oil prices make the biggest difference in profits for airlines companies. If oil continues to rise, airlines will have to raise ticket prices across the board. Higher tickets may impact the amount of customers willing to travel. If this happens and prices continue to rise, ALK's revenue,profits and FCF will take a hit. We have been in a bull run for 9 years(I argue less but won't talk about here) and its obvious we will hit a bear market eventually. Airlines are quite cyclical and a small recession will impact consumers spending. Much like oil prices, this will affect the revenue, profits and fcf for the company. They are also quite leveraged and higher interest rates could negatively effect their net income. A smaller risk is that the acquisition of Virgin America does not provide synergy causing investors to back out and lenders to be unwilling to give more money to ALK. The past 2 years have been rough. Alaska airline uses boeings while Virgin used Airbus which cause some operational issues. Management between the two took longer to become productive and internal politics became a bigger problem to solve than expected. This is clearly shown in the stocks lackluster performance over the past 2 years since the acquisition. While there maybe some rough road still ahead I believe management is becoming productive and the synergies will start to translate into earnings very soon.
Dividend: ALK currently pays a dividend of roughly 2%. It is expected to hit 2.09% next year. However I do not think it will grow significantly until after the synergies from the acquisition are realized.
Future Trends: Customer Service is more and more important as Americans have more money to spend. Considering the extremely low unemployment rates and the growth in spending power, It is reasonable to assume that Americans will choose to spend a little more to feel better. In this case it means paying a little extra for going from California to Seatle on ALK vs a budget ticket. IMO I think most customers will pay more for the satisfaction. As word of mouth continues to spread, more people will choose ALK over other West Coast airlines due to their strong brand and perks(free drinks!) The virgin acquisition strengthens their airport presence and with more hubs and more volume they should be able to lower prices while keeping their margins.
Expectations: Alaska Air Group stock is likely to continue its less than stellar growth this year. I personally have a price target of $70 by the end of 2018. Considering the summer months are the biggest for airlines, It has a possibility to get higher than $70 if they report significantly better than expected earnings for q2 q3. However we will have to wait until late this year, likely next year, for the earnings to stabilize and realize the synergies of Virgin acquisition. I have a price target of $100 by the end of 2019. And unless we have a bear market or considerably higher oil , I am confident in those targets. Although at they end of the day keep in mind they are just educated guesses and not accurate.
Conclusion: Alaska Air Group is a regional airline that has great brand strength as well as strong presence in their region. The stock has been lackluster due to some unexpected complications that arose when the acquisition of Virgin America took place. However I believe the complications have been solved and the power of the merger will start showing in the earnings soon. Due to the discount of intrinsic value to market price, as well as a decent 2% dividend,ALK is a great 3-6 year hold with potential to double.
Notes- Feel free to agree disagree , or even tear my analysis apart in the comments. Just keep it constructive and explain why. This is not a buy recommendation , rather its my opinion on the company.
Disclaimer- I am long ALK
Submitted July 07, 2018 at 12:49AM by luigie88 https://ift.tt/2KDR6IO
