Alaska Air Stock is the Perfect Bargain Buy

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U.S. stock markets are taking a breather from a huge four-month run-up through early-May 2019. Now that the stock market has finally pulled back, let’s go bargain hunting for undervalued growth stocks. Alaska Air stock is the perfect place to start!

Alaska Air Group, Inc. (ALK – yield 2.3%) is a low-cost passenger airline. Alaska Airlines and its regional partners fly 46 million guests a year to more than 115 destinations with an average of 1,200 daily flights across the United States and to Mexico, Canada and Costa Rica. Air service expanded again this year, including 10 new destinations and routes in the first quarter, and a June announcement of new service to Palm Springs, California.

Alaska Air is a well-respected airline. For the 12th year in a row, Alaska Airlines is recognized as the highest ranked airline in customer satisfaction among traditional carriers in the J.D. Power 2019 North America Airline Satisfaction Study. In this year’s study, Alaska received the highest ranking in six out of seven categories among traditional airlines: aircraft; check-in; cost and fees; boarding/deplaning/baggage; flight crew; and reservation.

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Alaska Air is focused on expanding margins in the coming years, primarily through increasing revenue and lowering operational costs, which are an ongoing result of the December 2016 Virgin America acquisition.

The Wall Street analyst consensus estimates point toward earnings per share (EPS) of $5.68 and $6.75 in 2019 and 2020, reflecting EPS growth rates of 27.4% and 18.8%, respectively. Those are tremendous growth rates, not unusual among mid-cap stocks, but highly unusual among large-cap stocks.

For comparison, Procter & Gamble Co. (PG) is expected to achieve EPS growth of 5.9% and 6.0% in 2019 and 2020, and Walmart (WMT) is expected to see EPS fall 1.6% in 2019, followed by 4.6% growth in 2020. Since strong earnings growth tends to be reflected in share prices over multi-year time periods, you can see why growth stock investors would gravitate toward smaller successful companies rather than the more famous, slow-growth corporate names.

Alaska Air Stock Undervalued

Alaska Air’s 2019 price/earnings ratio (P/E) is 10.8. That’s a nice low number, indicating that the stock is undervalued in comparison to its earnings growth rates.

Airline stocks have historically been hit-and-miss investments, with a long string of famous bankruptcies. There are two ways that an investor can protect themselves from owning stocks whose balance sheets crumble. First, make sure you’re invested in companies that are growing their earnings per share. That’s because rising profits are rarely associated with financial trouble. Second, monitor the long-term debt-to-capitalization ratio. I can find that number through Charles Schwab, MarketWatch and CFRA (formerly Standard & Poor’s). The number is updated after each quarterly earnings report. I’m relatively certain that your brokerage firm or research website supplies that debt ratio as well.

Alaska Air’s debt ratio is 29% as of March 2019. For point of reference, I try to avoid companies with debt ratios higher than 40%, although I wouldn’t begin seriously worrying unless that number rose to near 60%. American Airlines Group’s (AAL) debt ratio is 88%, so you can see it’s worth reviewing that number before making an investment decision!

Alaska Air held $1.4 billion of cash and marketable securities as of March 31. The company is committed to returning capital to shareholders via dividend increases – which take place annually near February 1 – and share repurchases, including $13 million of repurchases in the first quarter of 2019.

ALK is a mid-cap stock with a $7.6 billion market capitalization. For comparison, Procter & Gamble Co. (PG) and Walmart (WMT) are large-cap stocks, with $268 billion and $299 billion market capitalizations, respectively.

If you’re sticking with a diversified equity portfolio strategy, ALK is in the industrial sector along with transportation, aerospace, air freight & logistics, building products, and engineering companies.

At a price of 61, Alaska Air stock is sitting near the bottom of an established trading range, roughly between 51-80. There’s plenty of room for traders, growth stock investors and growth & income investors to potentially make good profit in both the short term and the long term. Buy ALK now to capitalize on the next upswing in the broader stock market.

Alaska Air stock was featured in my Cabot’s Top 10 Buy and Hold Stocks for 2019 report. Investors can find additional, timely growth stock ideas by subscribing to my Cabot Undervalued Stocks Advisor newsletter.

Timothy Lutts

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