With a $4.96 billion market cap, Alaska Air Group, Inc. (ALK) provides passenger and cargo air transportation services. The company operates three business segments: Mainline; Regional; and Horizon. It covers approximately 120 destinations throughout North America.

ALK delivered impressive results for the second quarter of fiscal 2022, surpassing Street estimates. It reported quarterly revenue of $2.70 billion on improved operational performance and achieved a record load factor for the quarter of 88%, driven by strong demand on reduced capacity.

“It’s clear that travel is one of the things people have missed the most these past two years. They are excited to fly again, and our team delivers on the safe, reliable, and caring experience they expect from us. We have a strong platform for growth in 2023 and a lot to be optimistic about,” said CEO Ben Minicucci.

The company provided an outlook for the third quarter ending September 30 and the full year 2022. ALK expects the passenger load factor for the third quarter to range from 85% to 88%. It expects total revenue for the quarter to be up 16% to 19% versus 2019. For the full-year 2022, the adjusted pre-tax margin is forecasted to be between 6% and 9%.

The company is also very committed to achieving its sustainability goals. Last month, ALK and Deloitte announced an agreement to advance the purchase and use of sustainable aviation fuels (SAF) through ALK’s new corporate SAF program to promote environmental sustainability.

Furthermore, the company finalized an agreement to purchase 185 million gallons of SAF from Gevo, Inc. (GEVO), expected to begin in 2026.

“Alaska Airlines is committed to a goal of net zero by 2040, and SAF is the primary lever to decarbonize over the near- and medium-term,” said Diana Birkett Rakow, Senior Vice President, ALK’s Public Affairs and Sustainability.

Shares of ALK have declined 12.5% over the past month to close the last trading session at $39.14. However, analysts expect the stock to hit the average price target of $63.3 in the near term, representing a 61.7% upside potential.

Here is what could influence ALK’s performance in the upcoming months:

Solid Financials

In the fiscal 2022 second quarter ended June 30, 2022, ALK’s total operating revenues increased 74.1% year-over-year to $2.66 billion, and its passenger revenue amounted to $2.42 billion, up 78.9% year-over-year. The company reported an adjusted net income of $280 million, compared to an adjusted net loss of $38 million in the second quarter of 2021.

Furthermore, the company’s adjusted net income per share came in at $2.19, compared to a loss of $0.30 per share in the prior-year period. Cash inflows from operating activities amounted to $948 million for the quarter. Also, as of June 30, 2022, its cash and cash equivalents stood at $778 million versus $470 million as of December 31, 2021.

Favorable Analyst Estimates

Analysts expect ALK’s revenue for the fiscal 2022 third quarter (ending September 2022) to come in at $2.81 billion, indicating an increase of 45.5% from the same period in 2021. The consensus EPS estimate of $2.38 for the ongoing quarter indicates an increase of 61.9% year-over-year. The company has topped the consensus revenue estimates in each of the trailing four quarters, which is impressive.

In addition, the company’s revenue for the fiscal year 2022 (ending December 2022) is expected to rise 61.4% from the previous year to $9.62 billion. Analysts expect the current year’s EPS to grow 321.7% year-over-year to $4.50.

High Profitability

ALK’s trailing-12-month levered FCF margin of 5.54% is 57.9% higher than the 3.51% industry average. Its trailing-12-month CAPEX/Sales of 10.04% is 240.6% higher than the 2.95% industry average. Also, the stock’s trailing-12-month cash from operations of $1.26 billion is 608% higher than the industry average of $177.68 million.

Attractive Valuation

In terms of forward non-GAAP P/E, ALK is currently trading at 8.77x, 39.9% lower than the industry average of 14.59x. The stock’s forward EV/Sales multiple of 0.60 is 60.8% lower than the industry average of 1.53. Likewise, its forward EV/EBITDA ratio of 4.11 compares with an industry average of 9.77.

In addition, in terms of forward Price/Sales, ALK is currently trading at 0.52x, 53.85% lower than the industry average of 1.12x. Its forward Price/Book of 1.16x is 48.1% lower than the industry average of 2.24x. The stock’s forward Price/Cash Flow multiple of 3.73 is 37.8% lower than the 12.14 industry average.

POWR Ratings Show Promise

ALK’s overall B rating equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. ALK has a B grade for Growth and Sentiment, consistent with its solid revenue and earnings growth estimates. In addition, it has a B grade for Quality, in sync with its higher-than-industry profitability metrics.

ALK is ranked #4 out of 31 stocks in the Airlines industry.

Beyond what I have stated above, we have also given ALK grades for Value, Momentum, and Stability. Get access to all ALK ratings here.

Bottom Line

ALK delivered impressive fiscal 2022 second-quarter results as travel demand outpaces capacity. Moreover, a positive long-term outlook for travel demand indicates the company’s promising growth prospects. Given ALK’s robust financials, high profitability, and lower-than-industry valuation, we think it could be wise to invest in this airline stock now.

How Does Alaska Air Group, Inc. (ALK) Stack Up Against its Peers?

ALK has an overall POWR Rating of B. One could also check out these other stocks within the Airlines industry with a B (Buy) rating: Deutsche Lufthansa AG (DLAKY), Qantas Airways Limited (QABSY), and Air France-KLM SA (AFLYY).

ALK shares were trading at $39.31 per share on Friday morning, up $0.17 (+0.43%). Year-to-date, ALK has declined -24.55%, versus a -22.68% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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