Alaska Air stock (NYSE: ALK) currently trades around $40 per share, roughly 45% below its pre-inflation shock highs of around $74 seen in April 2021. ALK has fared slightly better than its peer – Southwest Airlines stock (NYSE: LUV) – down 52% over this period. Most U.S. airline stocks have been weighed down as they cut their outlook for 2024 early this year amid higher costs and pricing woes. Alaska Air also lowered its 2024 earnings per share outlook to $3.50 to $4.50 in Q2, versus its prior guidance of $3.25 to $5.25. Alaska Air saw its stock trading at around $40 in June 2022, just before the Fed started increasing rates, and it’s still trading around those levels. This compares with 45% gains for the S&P 500 index over this period.
Notably, ALK has had a poor run, with the stock losing value in each of the last three years. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could ALK face a similar situation as it did in 2021 and 2023 and underperform the S&P over the next 12 months — or will it see a recovery?
Returning to the pre-inflation shock level of $74 implies that ALK stock will have to gain around 87% from here, and we don’t think that will materialize anytime soon. We estimate Alaska Air’s Valuation to be $48 per share, reflecting around 20% upside from its current levels of $40. Our forecast is based on 12x expected adjusted earnings of $4.01 per share in 2024.
Our detailed analysis of Alaska Air’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen since 2022. It compares these trends to the stock’s performance during the 2008 recession.
2022 Inflation Shock
Timeline of Inflation Shock So Far:
- 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
- Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
- April 2021: Inflation rates cross 4% and increase rapidly.
- Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
- June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
- July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
- October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P 500 recoup some of its losses.
- Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession but points to potential rate cuts in 2024
In contrast, here’s how ALK stock and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
ALK and S&P 500 Performance During 2007-08 Crisis
ALK stock declined marginally from nearly $5.24 in September 2007 (pre-crisis peak) to $4.91 in March 2009 (as the markets bottomed out). It bounced after the 2008 crisis to levels of around $7.75 in early 2010, rising over 55% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.
Alaska Air’s Fundamentals Over Recent Years
Alaska Air’s revenue rose from $6.2 billion in 2021 to $10.5 billion now in the last twelve months. Airlines at large have seen a strong rebound in air travel demand after the pandemic. Alaska has seen its capacity expand, while its occupancy and yield have trended lower lately. Although the company saw its sales rise, its operating margin contracted from 10.9% to 7.3% over the same period. Higher revenues and margin contraction resulted in reported earnings falling to $1.76 per share over the last twelve months, versus $3.77 per share in 2021.
The airlines in the U.S. at large have had a tough start to 2024. Looking at the previous quarter, Alaska Air reported revenue of $2.9 billion, 2% higher than the prior-year quarter’s figure. Alaska reported a 6% rise in available seat miles, while the load factor was down 290 bps, and yield remained flat. Fuel costs per gallon increased by 3% y-o-y. This weighed on the pre-tax consolidated margin, which stood at 15.8% in Q2’24 vs. 18.3% in the prior-year quarter. The earnings contracted to $2.55 on a per-share and adjusted basis, compared to $3.00 per share in Q2’23.
Does Alaska Air Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?
Alaska Air’s total debt remained around $4 billion since 2021, while its cash decreased from $3.1 billion in 2021 to $2.5 billion now. The company also garnered $1.1 billion in cash flows from operations in the last twelve months. Given that Alaska Air’s market capitalization is only $5 billion, a debt level of $4 billion implies a high debt to equity ratio of 80%. On the other hand, the company does have a good cash cushion, implying that it’s in a comfortable position to service its near-term obligations.
Conclusion
With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe Alaska Air stock has the potential for gains once fears of a potential recession are allayed. That said, the pressure on the company’s balance sheet, and the impact of rising costs on the company’s profitability lately, remains a significant risk factor to realizing these gains.
While Alaska Air Lines stock has the potential for gains, check out how Alaska Air’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
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