As of July 8, 2016, Alaska Air Group (ALK) had a forward EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) ratio of 3.21x. Its valuation is lower than its average valuation of 3.9x in November 2009.
Let’s look now at EV-to-EBITDA ratios for other airlines as of July 8, 2016:
- United Continental (UAL): 3.1x
- Delta Air Lines (DAL): 3.6x
- Southwest Airlines (LUV): 4.9x
- American Airlines (AAL): 4.7x
- JetBlue Airways (JBLU): 3.6x
- Spirit Airlines (SAVE): 6.9x
- Allegiant Travel (ALGT): 6.0x
The Market is expecting ALK’s EBITDA to increase 7.4% in 2016. In the same period, UAL’s EBITDA is expected to decline by 7% and AAL’s by 0.5%. DAL’s EBITDA is expected to increase by 18%, LUV’s by 9%, JBLU’s by 10%, SAVE’s by 3%, and ALGT’s by 4%.
Valuation multiples are dependent on the perceived risk and thus investor willingness to pay. The subprime crisis led the world into recession in 2008. Similarly, 2011–2012 was a period of a global bear Market due to a weakness in emerging markets and high inflation in Europe. These were periods in which valuation multiples were at historic lows.
Airlines are a cyclical industry and have broadly tracked Market performance. We’re currently in a situation of growing global turmoil and a weakening credit market. In this type of situation, most investors view the current profitability as unsustainable. If industry fundamentals deteriorate or investor risk appetite declines, valuation multiples could fall.
In a downturn, companies with high leverage become more risky. Low-leverage companies will be rewarded in a downturn. In fact, this is one of the main reasons Alaska Air has enjoyed a higher valuation multiple in the past.
On the other hand, if fuel prices fall further or if demand continues to grow at a high rate, airline stocks could actually see their valuation multiples improve.
In Alaska Air’s upcoming earnings, investors need to watch for the company’s capacity guidance for 2016. They should also keep an eye on capacity utilization and margin trends.
Alaska Air forms 0.53% of the SPDR Russell 1000 Momentum ETF (ONEO).