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Alaska Air Group’s Valuation: What’s Priced In?

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Alaska Air’s current valuation

Alaska Air Group (ALK) is currently valued at 6.0x its forward EV-to-EBITDA[1. enterprise value to earnings before interest, tax, depreciation, and amortization] ratio. That’s higher than its average valuation of 4.3x since November 2009.

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Peer comparison

Below are the EV-to-EBITDA ratios for Alaska Air’s peers:

  • American Airlines (AAL): 6.4x
  • United Continental Holdings (UAL): 5.3x
  • Delta Air Lines (DAL): 5.4x
  • Southwest Airlines (LUV): 6.2x
  • JetBlue Airways (JBLU): 5.6x
  • Spirit Airlines (SAVE): 6.3x
  • Allegiant Travel (ALGT): 6.7x

Alaska Air’s EBITDA is expected to rise 13.0% over the next year. Below are the market EBITDA expectations for its peers:

  • Delta Air Lines (DAL): expected to fall 0.40%
  • American Airlines (AAL): expected to fall 0.10%
  • United Continental Holdings (UAL): expected to fall 4.0%
  • Southwest Airlines (LUV): expected to fall 1.5%
  • JetBlue Airways (JBLU): expected to fall 2.7%
  • Spirit Airlines (SAVE): expected to fall 11.5%
  • Allegiant Travel (ALGT): expected to fall 0.70%

Our analysis

Valuation multiples are dependent on perceived risk and thus investors’ willingness to pay. 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 situation, the current profitability is viewed as unsustainable by most investors. If industry fundamentals deteriorate or investor risk appetite falls, valuation multiples could also fall.

In a downturn, companies with high leverages become risky, and low leverage companies will be rewarded. In fact, that’s one reason Alaska Air has enjoyed higher valuation multiples in the past.

However, rising fuel and labor costs have made investors cautious about the industry’s future, even though more focus on improving yields and thus revenues is a positive sign. So it’s important for airlines to follow the capacity reduction path.

In ALK’s upcoming earnings release, watch its capacity guidance for 2017. You should also keep an eye on capacity utilization and margin trends.

Alaska Air Group forms ~1.6% of the holdings of the Power Shares DWA Momentum ETF (PDP).

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