In the world of airline investing, Alaska Airlines ( ALK) is undercovered by analysts, unloved by traders and overlooked by Wall Street. But as the second-quarter earnings season approaches, this airline based in the Pacific Northwest could be undervalued as well. The company is increasingly a favorite of short-sellers, in part because its capital structure makes the chance of a wide earnings miss higher than average. When Alaska Air releases second-quarter earnings on July 22, the mean estimate of nine analysts polled by Thomson First Call is for a loss of 60 cents a share. But, partly because the company only has 26.6 million shares outstanding, earnings estimates run the gamut, from break-even to a loss of $1.15 a share. In a June 16 filing with the Securities and Exchange Commission, Alaska Air said May business fundamentals were improving, with load factor jumping to 69.9% from the year-ago 65.7% at its Alaska Air unit. Its Horizon Air unit, which runs smaller, propeller planes, posted a similar increase. Despite the good news, none of the major brokerages have upped their earnings estimates or commented on the company's SEC filing, now a week old.
Caribou"Nobody's focused on this," said Helane Becker, analyst at Benchmark Co. "The only person to do anything on this raised their estimate from a loss of 66 cents to a loss of 44 cents. Certainly analysts are not focused on their earnings right now. This company is being overlooked and that's why we have it a buy." Indeed, a month ago, Citigroup Smith Barney dropped coverage on the company "as part of an effort to more effectively deploy" its research. Major brokerages rarely issue company-specific notes on Alaska Air, generally only mentioning the name in sector analyses. And because Alaska Air rarely does investment banking, there's less incentive to cover the airline closely.
Becker, who has no banking interests with Alaska Air, is Wall Street's biggest bull on the carrier. After running Alaska Air's May numbers through her business model, she thinks it has a shot of turning a profit this quarter and believes the company raised its cash reserves by $40 million in the last quarter. "Depending on June, it could go either way," she said. It should be noted that the estimates exclude $71 million in government help the company will record this profit; with that the company will easily make money. Ultimately, break-even is a risky call. It won't take very much for the company to surprise analysts -- in either direction -- because of the small float and the business model's leverage. Current investors know this all too well, having been burned when Alaska Air missed to the downside in the first quarter of 2003 and fourth quarter of 2002, snapping a streak of upside surprises. "Most of these major airlines have very few shares outstanding, so for Alaska Air to beat my estimate of a 45-cent loss, they only have to have $11 million in
earnings upside," said Jim Corridore, analyst at Standard & Poor's. "That's not big for a company with $2.2 billion in revenue. The leverage is so great."
The Alaska Airlines StoryDespite a balance sheet that's stronger than many in the industry, Alaska Air is relatively unknown on the East Coast. One of the nation's 10 largest airlines, the company has hubs in Anchorage, Alaska; Portland, Ore.; Los Angeles; and Seattle, and generated more than $2 billion in sales last year.
|Alaska Air's Earnings a Tough Call |
|*Excludes gain from government aid. |
Source: Thomson First Call
But where the company stands out is in the innovative use of technology, winning the 2003 Technology Leader of the Year Award from Air Transport World magazine and the 2003 Airline Strategy Award for Technology from Airline Business Magazine. "They focus on using technology to reduce costs and improve the efficiency of the airline," said Jamelah Leddy, analyst at McAdams Wright Ragen. "They were the first to use the kiosks to check in passengers, the first to do Web check-in and the first carrier to sell tickets on the Internet." Technology may give Alaska Air an advantage over rivals, but it has done little to lower fixed costs, which is one reason many analysts prefer other names. The carrier's cost per available seat mile, a metric called CASM, and load factor are fairly ordinary. According to research from Leddy, through the end of 2002, Alaska's CASM was 8.5 cents a mile, 3 cents higher than JetBlue ( JBLU), 2.2 cents higher than Southwest Airlines ( LUV) and higher than both Continental Airlines ( CAL) and Northwest Airlines ( NWAC). And while many on Wall Street, including Corridore, UBS Warburg's Sam Buttrick and Lehman Brothers' Gary Chase, believe that Alaska will beat the current consensus, Becker is the only one who thinks the carrier has a shot at a profit. Even Leddy, who rates the company a buy and says "it doesn't deserve to be overlooked," thinks a profit is quite a stretch. "They have a ways to go with costs. They need better yields," said Leddy, noting that according to her model, Alaska Air's companywide load factor would have to be above 75% in order to reach break-even. "I think it's pretty far-fetched to assume a profit."
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