American Airlines Group Inc. (AAL) in Fort Worth, Tex., is a network air carrier that provides scheduled air transportation services for passengers and cargo. The company offers an average of nearly 6,700 flights per day to nearly 350 destinations in more than 50 countries. In comparison, Alaska Air Group, Inc. (ALK) operates as a passenger and cargo air transportation company. The Seattle, Wash.-based company operates through three segments: Mainline, Regional, and Horizon.
Significant progress on the vaccination front and the gradual easing of travel restrictions are driving a strong rebound in demand for air travel. Consequently, the airline industry is expected to recover some of its pandemic-led losses in the near term. Analysts expect the global RPKs (Revenue Passenger Kilometers) to improve by 50% in 2021. The rising demand for travel should allow AAL and ALK to improve their financials in the coming months.
AAL has gained 42.2% over the past six months, while ALK has returned 16.8% over this period. Also, AAL’s 40% gains year-to-date compare with ALK’s 16.5%. But, in terms of their past year’s performance, AAL is the winner with 93.9% gains versus ALK’s 72.7%.
But which stock is a better buy now? Let’s find out.
On July 20, AAL announced that the company, in partnership with JetBlue Airways Corporation (JBLU), will operate more than 700 daily flights and provide its customers with a seamless travel experience. With this alliance, the company aims to meet the needs of more travelers.
On June 10, AAL announced its plan to invest in Vertical Aerospace, a leading U.K.-headquartered engineering and aeronautical business that is developing electric vertical takeoff and landing (eVTOL) aircraft. The plan is indicative of AAL’s focus on emerging technologies to reduce carbon emissions and its willingness to invest in innovation to improve the customer experience.
Also in June, ALK inked a codeshare agreement with Qatar Airways to provide travelers with exciting and convenient options. This agreement, combined with its existing partnerships, should help strengthen its presence in the industry.
ALK in June unveiled its plan to expand its connections from Boise Airport by adding new routes and more flights. The company is set to have up to 30 daily nonstop departures from Boise to 14 destinations on Alaska Air and its sister carrier Horizon Air by this winter. This expansion amid the rebounding demand for traveling should lead to higher revenues for ALK.
Recent Financial Results
AAL’s total operating revenues increased 361% year-over-year to $7.48 billion in its fiscal second quarter, ended June 30. Its operating income stood at $441 million, up 117.7% from the same period last year. Its net income grew 100.9% from its year-ago value to $19 million. The company’s EPS increased 100.6% year-over-year to $0.03.
ALK’s total operating revenues increased 262.7% year-over-year to $1.53 billion in its fiscal second quarter, ended June 30. Its operating income stood at $549 million, up 290.6% from the same period last year. And its net income grew 285.5% from its year-ago value to $397 million. The company’s EPS increased 281% year-over-year to $3.15.
Expected Financial Performance
Analysts expect AAL’s revenue to increase 203.4% in the current quarter, 62.8% in the current year, and 38.7% in the next year. The company’s EPS is expected to grow 77.3% in the current quarter and 56.6% in the current year. Furthermore, its EPS is expected to climb 99.2% in the next year.
For ALK, analysts expect the company’s revenue to increase 159.8% in the current quarter, 75.9% in the current year, and 37% in the next year. The company’s EPS is expected to grow 119.2% in the current quarter and 70.4% in the current year. The company’s EPS is expected to grow 261.1% in the next year.
AAL’s trailing-12-month revenue is 4.88 times ALK’s. However, both companies have a 0.27 asset turnover ratio.
In terms of forward EV/Sales, AAL is currently trading at 1.44x, which is slightly higher than ALK, which is currently trading at 1.28x. Also, AAL is currently trading at 36.03x its non-GAAP EPS estimate for fiscal 2022, which is 69% higher than ALK’s 11.18x.
Thus, ALK is a relatively cheaper stock here.
ALK has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. AAL, in contrast, has an overall C rating, which translates to Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
ALK has a B grade for Sentiment. This is justified because all five Wall Street analysts that rated the stock have rated it Buy. AAL, in comparison, has a grade of D for Sentiment. Of the 10 Wall Street analysts that rated the stock, only two rated it Buy while six rated it Hold and two rated it Sell.
Both stocks have a B grade for Growth. ALK’s EBIT has increased 202.5% year-over-year, while ALK’s EBIT increased 1744.7% over this period, which is consistent with their growth grades.
Among the 29 stocks in the Airlines industry, ALK is ranked #2 while AAL is ranked #11.
The airline industry is recovering as countries ease travel restrictions and people engage in leisure travel. Though both AAL and ALK are established companies in this space, we think ALK’s lower valuation and stronger earnings growth potential make it the better buy here.
Our research shows that odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Airlines industry here.
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ALK shares were trading at $59.32 per share on Tuesday afternoon, down $1.24 (-2.05%). Year-to-date, ALK has gained 14.08%, versus a 18.19% rise in the benchmark S&P 500 index during the same period.
About the Author: Subhasree Kar
Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...
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