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Can Alaska Air Group’s Valuation Rise Further in 4Q15?

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Valuation multiple

Previously in this series, we looked at Alaska Air Group’s (ALK) 3Q15 earnings report and at how the company continues to report stellar performance. Now let’s see how these factors have affected its valuation multiple and see where the airline’s peers are trading.

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Why EV/EBITDA?

Airlines are capital-intensive, with high levels of depreciation and amortization. They also have varying degrees of debt and operating leases.

To neutralize these factors, we use the EV/EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio for valuing airline stocks. The forward EV/EBITDA ratio shows what investors are willing to pay for the next four quarters of estimated EBITDA.

ALK’s forward EV/EBITDA multiple

Following its 3Q15 earnings, Alaska Air Group’s (ALK) shares increased 3.64% as it beat earnings expectations. As a result, its valuation multiple increased by 3.9%.

  • Alaska Air Group is currently trading at a forward EV/EBITDA multiple of 5.5x, which is higher than its average valuation of 3.24. This indicates that analysts may be estimating higher growth in the next four quarters.
  • Alaska traded its all-time high multiple of 5.92x in September 2015 and an all-time low of 2.12 in February 2013.
  • Following the 3Q15 earnings release, analysts have maintained a 4Q15 EPS estimate of $1.43 per share, or ~52% year-over-year growth.
  • For fiscal 2015, analysts are now expecting a 54% growth in EPS to $6.44. This is a combination of Alaska Air Group’s growth, cost-cutting efforts by its management, and fuel cost savings.
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Peer comparison

Alaska Air Group is trading closer to its low-cost carrier peers JetBlue Airways (JBLU), Spirit Airlines (SAVE), and Southwest Airlines (LUV). Southwest Airlines enjoys the highest forward EV/EBITDA multiple of 5.6x. JetBlue Airways is trading at 5.4x and Spirit Airlines has a multiple of 5.29x. Delta Air Lines (DAL) is currently trading at 4.7x, American Airlines (AAL) is trading at 4.6x, and United Continental Holdings (UAL) is trading at 4.12x.

Investors can gain exposure to airlines through the SPDR S&P Transportation ETF (XTN). Airlines comprise 26.54% in XTN.

Takeaway

Alaska Air Group (ALK) is one of the most financially stable, debt-free airline companies in the US. It has demonstrated impressive operational performance amid a slowing airline industry. It is the only other investment-grade airline stock in the US, with excellent financial management, low-cost structure, expanding margins, and award-winning customer service.

Most of this has been factored in the valuation. As fuel costs recover and airlines compete to fill their ever-increasing capacity, we feel the upside to Alaska Air Group could remain limited.

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