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NEW YORK (TheStreet) -- Most people think of American Airlines (AAL) - Get Free Report, Delta Air Lines (DAL) - Get Free Report, and Southwest Airlines (LUV) - Get Free Report when discussing U.S. airlines, but the much smaller and thinly traded Alaska Air Group (ALK) - Get Free Report is rarely brought up. Despite having gains of 30.33% year to date, Alaska Air is a laggard to its larger competitors, which have positive returns of 69.19%, 34.13%, and 50.72%, respectively.

Delta Air Lines and Southwest Airlines have both been advocates of stock buybacks and dividends recently, but neither has been more shareholder-friendly than Alaska Air. On May 12, Alaska Air's board approved a 25-cent quarterly dividend and a share repurchase program of up to $650 million. This is on top of $42 million left from a $250 million buyback program from September 2012.

Although $650 million doesn't sound large compared to Delta's $2 billion buyback program that will be completed by the end of 2016, Alaska Air has a market cap roughly five times smaller than Delta's ($6.6 billion vs. $32.7 billion). The combined buyback programs of Alaska Air represent a massive 10%-plus of its current market cap. Prior to this announcement, it had repurchased $519 million worth of stock since 2007.

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Dividends are a small part of evaluating whether an airline is an attractive investment because they are few and far between. However, Alaska Air's 1.06% dividend yield is marginally higher than Delta's 0.62% and Southwest's 0.87%. None of the other major U.S. airline companies pay dividends or have buyback programs.

On April 9, Alaska Air reported first-quarter EPS of $1.28, topping the average analyst estimate of $1.02 (an increase of 106% from the first-quarter of 2013). Revenue rose 8% to $1.22 billion. Total first-quarter traffic, a combination of Alaska Airlines, Horizon Air, SkyWest, and Penair, jumped 4.5%. Momentum has carried over into the second quarter with June traffic rising 5.3% year over year with capacity expanding 5.5%. Second-quarter earnings are set to be released July 24.

Alaska Air trades at a price-to-earnings ratio of 11.9 (based on 2015 earnings estimates), which is very cheap on a valuation basis when factoring in the expected 12.5% EPS growth (price-to-earnings-to-growth ratio of 0.95). Revenue will grow 5.9% next year, according to Wall Street estimates. (The stock trades at a price-to-sales ratio of 1.3). The average analyst price target of $108 is more than 11% greater than the current share price. On May 27, J.P. Morgan maintained its overweight rating on the stock but raised the price target from May 1 to $113.50 from $111. However, on May 30, Stifel Nicolaus downgraded the stock to hold from buy after it hit the firm's $100 price target from Feb. 25.

Large Call-Spread Buyer Looks for Double-Digit Gains by October

The Oct $100/$115 call spread was put on 10,000 times for a $3.80-$4.00 debit on May 7-May 8. This trade was part of a rollout from 5,000 July $80 calls. To put the Oct $100/$115 call-spread buyer into perspective, of the 32,829 call open interest, this trade represents 62% of the existing open call positions. The trader has a breakeven point of $103.80-$104.00 by October options expiration with upside potential to $115 (max gain is roughly 285% on a close at or above $115 on expiration).

Low-Risk Entry Point on The Weekly Chart

Alaska Air Group Options Trade Idea

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Buy the Oct $100/$115 call spread for a $4.00 debit or better. (Buy the Oct $100 call and sell the Oct $115 call, all in one trade.)

Stop loss: None

First upside target: $8.00

Second upside target: $12.00

Third upside target: $14.00

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At the time of publication, Warren was long the Oct $100/$115 call spreads.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Now let's look at TheStreet Ratings' take on Alaska Air:

TheStreet Ratings team rates ALASKA AIR GROUP INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate ALASKA AIR GROUP INC (ALK) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, revenue growth, notable return on equity and good cash flow from operations. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Powered by its strong earnings growth of 164.70% and other important driving factors, this stock has surged by 84.42% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, ALK should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • ALASKA AIR GROUP INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, ALASKA AIR GROUP INC increased its bottom line by earning $7.17 versus $4.37 in the prior year. This year, the market expects an improvement in earnings ($7.25 versus $7.17).
  • The revenue growth significantly trails the industry average of 45.9%. Since the same quarter one year prior, revenues slightly increased by 7.8%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Airlines industry and the overall market, ALASKA AIR GROUP INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
  • Net operating cash flow has increased to $242.00 million or 14.15% when compared to the same quarter last year. Despite an increase in cash flow, ALASKA AIR GROUP INC's cash flow growth rate is still lower than the industry average growth rate of 62.95%.