By J. Royden Ward, Editor of Cabot Benjamin Graham Value Letter
From Cabot Wealth Advisory 8/16/10 Sign up for free Cabot Wealth Advisory e-newsletter
Airline stocks tend to fluctuate with the health of the economy and the swings in fuel prices. The resulting volatility and airlines’ high debt levels cause most of the airline stocks to become risky selections. Yet, the wide fluctuations in the prices of airline stocks provide the nimble investor with plenty of opportunities.
The airline industry is poised for a return to profitability this year. Carriers are reporting better summer booking trends, which reflect an economy that is beginning to move slowly forward. Corporate as well as consumer flying is on the rise, a trend that should continue during the next several quarters. Major carriers are neither planning increases in service nor adding jets to their fleets. Productivity and planeloads are improving, and fuel prices have become less volatile and remain at reasonable levels. Another trend to note is that smaller, more-efficient airlines continue to gain market share from the largest airlines.
One such airline is Alaska Air Group (ALK), based in Seattle, operator of Alaska Airlines, which contributes 81% of the company’s total revenues, and Horizon Air Industries, which makes up the other 19%.
The Alaska division is a major airline serving destinations along the Pacific Coast, Alaska, Hawaii, Canada and Mexico. The Horizon Air division is a regional carrier, which complements Alaska Air with connecting flights to smaller cities using smaller, more efficient planes.
J.D. Power rated Alaska Air the “Highest in Customer Satisfaction” for the third year in a row in 2010. In addition, the company has held the top spot for on-time performance for 13 of the last 14 months.
Alaska Air has completed its transition to an all-Boeing fleet composed of 115 jets with an average age of 7.5 years. Horizon is in the process of transitioning to an all-Bombardier Q400 turboprop airplane fleet with a current average age of 5.8 years. Alaska Air recently signed multi-year contracts with its pilots, flight attendants, and mechanics.
Revenues increased 16% and EPS tripled during the quarter ended 6/30/10 boosted by fuller planes, lower costs, higher ticket prices and flights to new cities. We expect 25% EPS growth during the next 12 months as the company expands its service to Hawaii and Mexico and closes less profitable routes. At 8.5 times our 12-month forward earnings per share estimate of 5.85, ALK shares are a real bargain at the current price.
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A lifelong investment professional, J. Royden Ward applies his 40 years of investment research, portfolio management, writing and publishing experience to his role as analyst and editor of Cabot Benjamin Graham Value Letter, which is directed to long-term investors seeking a guide to profitable value investing based on the time-tested systems originally developed by Benjamin Graham, the Father of Value Investing. A second-generation disciple of Benjamin Graham, Roy in 1969 pioneered the development of a computerized model that applied the formulas developed by Graham using a unique ranking system. Today, Roy applies his system to two models in the Value Letter.
|Alaska Air Group (ALK)
19300 International Boulevard
Seattle, WA 98188
|Index Membership: S&P 400 MidCap, S&P 1500 Super Comp
Industry: Regional Airlines
Full Time Employees: 12,440