This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Alaska Airlines Confronts Fickle Wall Street

Stocks in this article: AAMRQ.PK ALK DAL JBLU LCC

SEATTLE -- ( TheStreet -- Alaska Airlines (ALK) is hardly the first company to discover that Wall Street is fickle.

The carrier led the industry in 2011 with a 30% share price gain. But this year, with the Arca Airline Index (ALK) up 12%, Alaska shares are down 11%, the biggest decline in the industry. Shares closed Thursday at $34.04, off 43 cents.

Airline analysts are not deterred though, and several have recently issued buy ratings. They include Mike Derchin of CRT Capital Group, whose recent report on the carrier was entitled "Valuation Indicates Stock Extremely Mispriced."

"Alaska was the first network airline to earn its cost of capital in the high jet fuel price, sluggish economic environment of 2010 and 2011" and will do so again in 2012, Derchin wrote. But "instead of rewarding Alaska for successfully generating above average returns on a consistent basis, the market is penalizing it. The market seems to have concluded that Alaska's transformation is not permanent."

In terms of total enterprise value to EBITDAR (earnings before interest, taxes, depreciation, amoritization and rent), a frequently used valuation metric for airlines, Alaska is at 3.6 times the latest 12 month EBITDAR, compared with 5.1% for the industry. Normally, the ratio is between 4x to 7x. "This is why it is so cheap," Derchin said in an interview, adding that he is uncertain why investors are staying away.

One possibility is that Alaska has trailed the industry in passenger revenue per available seat mile, or PRASM, growth for two consecutive quarters. In the first quarter, Alaska PRASM grew 5.1% while industry PRASM grew 8.4%. In the second quarter, Alaska PRASM grew 3.7% while industry PRASM grew 6.2%. Additionally, it could be that investors are put off by Alaska's 6% annual capacity growth rate at a time when many airlines have flat capacity growth. "Maybe people think network carriers should not be growing so fast," Derchin said.

In particular Alaska is growing in Hawaii, which now accounts for 20% ofits capacity. Alaska's Hawaii growth began when Aloha Airlines shut down in 2008. Derchin said part of the benefit derives from passengers who choose Alaska's long-distance East Coast routes partially to accumulate frequent flier miles to use for trips to Hawaii. Maxim Group analyst Ray Neidl said in a recent report that Alaska's Hawaii traffic is growing about 45% annually.

Derchin has, however, reduced his 2012 estimate to $4.95 per share. Analysts surveyed by Thomson Reuters are currently estimating a profit of $4.89 per share. Derchin also reduced his price target to $66, based on five times estimated 2012 EBITDAR.

Like US Airways (LCC), JetBlue (JBLU) and Frontier, Alaska is on the list of carriers that AMR CEO Tom Horton considers to be a possible candidate for a merger with American. However, like JetBlue, Alaska does not view itself as a merger candidate.

"We have said for many years that our preference is to remain a strong, vibrant, independent company," said spokeswoman Bobbie Egan, in a prepared statement. "We think our current plan provides the best outcome for all of our stakeholders - including employees, customers and shareholders."

Neidl and S&P Capital IQ analyst Jim Corridore, like Derchin, have buys on Alaska stock. In a recent note, Corridore raised his 2012 profit estimate to $4.98 per share, while his target price remains at $43. Corridore values the shares at 4.1x estimated 2012 EBITDAR.

"We think Alaska is likely to see strong summer travel demand help its Q3 results, and believe the company has reduced its seasonality with an expanded network," he wrote.

Neidl said "the fundamentals should continue to support a strong stock price." Additionally, he said, "with its strategic and successful position, the company remains an attractive takeover target (as) its route system would be attractive to larger airlines such as AMR or Delta (DAL)."

A downside, Neidl said, is that "an acquisition by a larger carrier would be ruinous to Alaska's service and even to the acquirer, who would benefit more from code sharing agreements with Alaska than from an actual acquisition."

--Written by Ted Reed in Charlotte, N.C.

>To contact the writer of this article, click here: Ted Reed

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs