Shares of Seattle, WA-based airline heavyweight Alaska Air Group (ALK) have had a good time on the bourses of late, improving in double-digits over the past 30 days. The encouraging price performance resulted in ALK outperforming its industry in the said time frame. Moreover, ALK’s price performance compares favorably with that of fellow U.S. airline operators Southwest Airlines Co. (LUV) and Delta Air Lines DAL in the same time frame.
One-Month Price Comparison
Image Source: Zacks Investment Research
Currently trading at $41.34, the stock rebounded 34.44% from its 52-week low of $30.75 on Nov. 1, 2023. However, it still reflects a significant 10.42% discount from its 52-week high of $46.15 reached on April 22.
Given the recent rally, the question that naturally arises is whether ALK stock can sustain its bullish price performance or should investors book profits now. Before that, let's delve deep to unearth the reasons behind this northward price movement.
ALK Issues Bullish Q3 View on Upbeat Summer Travel
ALK has raised its third-quarter 2024 adjusted earnings per share (EPS) guidance to the range of $2.15-$2.25 from the previously guided range of $1.40 to $1.60. The Zacks Consensus Estimate for EPS is currently pegged at $1.64. Improved revenue and fuel cost outlook have led to the encouraging EPS forecast.
Backed by the upbeat demand, Alaska Air now expects its third-quarter 2024 revenue per available seat mile (a key measure of unit revenues) to be up 2% on a year-over-year basis, an improvement from the previous forecast of flat to positive.
ALK continues to expect third-quarter capacity (measured in available seat miles) to increase in the range of 2-3% on a year-over-year basis.
Declining fuel expenses (owing to the moderating crude oil and West Coast refining margins) mark another major positive. ALK now anticipates third-quarter 2024 economic fuel cost per gallon in the range of $2.60-$2.70 (prior view: $2.85-$2.95). Lower fuel costs should boost the company’s bottom line, as fuel expenses represent a key input cost for any transportation player.
Apart from the air travel demand strength, additional revenues in July related to the CrowdStrike CRWD-induced disruptions across the industry and stronger performance in August and September also contributed to ALK’s top-line growth. The global technology outage on July 19, caused by security software provider CrowdStrike’s software update, has hit some of the major U.S. airlines, leading to multiple flight cancelations. ALK reaped the benefits from the troubles of its competitors’ flight cancelations.
Driven by upbeat air-travel demand, ALK has introduced new routes. ALK has also increased the number of daily flights in its network that fly to popular destinations. The expansion of capacity to meet the demand swell in summer seems to have paid off.
Impressive Valuation Picture for ALK Stock
From a valuation perspective, ALK is trading at a discount compared to the industry, going by its forward 12-month price-to-sales ratio. The reading is also below its median over the last five years. The company has a Value Score of A.
Image Source: Zacks Investment Research
Rising Expenses Weigh on Alaska Air Stock
Escalating operating expenses due to the rise in labor and airport costs are hurting ALK’s bottom line. Expenses on wages and benefits increased 7% during the first half of 2024. Evidently, operating expenses were up 2% during the first half of 2024.
Consolidated operating costs per available seat mile (excluding fuel and special items) rose 4% year over year to 10.67 cents in the first half of 2024.
For third-quarter 2024, consolidated operating costs per available seat mile (excluding fuel and special items) are expected to increase in the high single digits.
Given this headwind surrounding the stock, earnings estimates have been southbound, as shown below.
Image Source: Zacks Investment Research
To Conclude
It is understood that ALK stock is attractively valued, and upbeat air travel demand is contributing to ALK’s top line. However, investors should refrain from rushing to buy ALK now due to the headwinds that it faces.
Instead, they should monitor the company’s developments closely for a more appropriate entry point. For those who already own the stock, it will be prudent to stay invested. The stock’s Zacks Rank #3 (Hold) supports our thesis. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Delta Air Lines, Inc. (DAL) : Free Stock Analysis Report
Southwest Airlines Co. (LUV) : Free Stock Analysis Report
Alaska Air Group, Inc. (ALK) : Free Stock Analysis Report
CrowdStrike (CRWD) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
