As you start analyzing individual stocks as potential investing opportunities, one of the most logical steps to take is to analyze the stock’s industry. A strongly performing industry, more often than not should act as a positive catalyst to the stock you’re considering. In the same light, concerns about the industry can usually be expected to extend into pressure on the stock you’re thinking about that might limit how much upside there is to work with.
Negative pressure on an industry can come in a variety of forms. Problems found in some of the largest, most established companies in an industry or sector, for example, will sometimes bleed into smaller companies in the industry. A good example of this right now comes from the airline industry. Over most of 2019, Boeing Co. (BA) has lost nearly 26% of its value as their top-selling jet, the 737 MAX has been grounded all over the world following two fatal crashes that killed all passengers. The company’s handling of the tragedy, and indications of severe problems in the development and production of the jet that have yet to be satisfactorily addressed have kept the jet grounded, and even forced the board to fire the company’s CEO.
BA’s issues haven’t just affected its stock; airlines in general have encountered a fair bit of volatility as well, as many of the best-known airlines, including Southwest (LUV) and American Air Lines (AAL) have the plane taking up a significant portion of its available fleet. Global groundings means those carriers have had to cancel flights and scramble to find ways to compensate. Cancelled flights have, in many cases meant issuing refunds to passengers, so it isn’t all that surprising that many of the carriers with significant portions of its fleet made up of the MAX have started including drawdowns from those cancellations in their earnings reports.
The interesting thing is that while this is a problem that is affected the industry at large, there are still stocks that are showing good resilience, simply because they don’t have any MAX planes in their fleets. Call it luck if you like; but one example of what I mean is Alaska Air Lines (ALK). The fifth-largest U.S. carrier operates on a regional basis, and has had about 30 pending orders for the plane, but never has taken delivery on any of them. That may be the primary reason that the company’s price performance has belied BA concerns that have negatively impacted some of its bigger competitors; the stock is up about 20% since mid-March, and is in the midst of a nice upward trend. The company’s latest earnings report showed some impressive fundamental characteristics, which has been a positive for the stock’s strength since March, but still puts an interesting value opportunity on the table to consider.
Fundamental and Value Profile
Alaska Air Group, Inc. is the holding company of Alaska Airlines (Alaska), Virgin America Inc., Horizon Air (Horizon) and other business units. The Company operates through three segments: Mainline, Regional and Horizon. Its Mainline segment includes Alaska’s and Virgin America’s scheduled air transportation for passengers and cargo throughout the United States, and in parts of Canada, Mexico, Costa Rica and Cuba. Its Regional segment includes Horizon’s and other third-party carriers’ scheduled air transportation for passengers across a shorter distance network within the United States under capacity purchased arrangements (CPAs). Its Horizon segment includes the capacity sold to Alaska under CPA. Alaska and Virgin America operate fleets of narrowbody passenger jets. As of December 31, 2016, it maintained two frequent flyer plans: the Alaska Airlines Mileage Plan and the Virgin America Elevate. ALK has a current market cap of about $8.1 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased nearly 38%, while revenues improved 8%. The picture got even better in the last quarter, as earnings increased more than 21.2%, while sales nearly 4.41%. The company’s margin profile is an indication of increasing strength, as Net Income as a percentage of Revenues over the last twelve months was 7.09%, and strengthened in the last quarter to 13.47%.
Free Cash Flow: ALK’s free cash flow is healthy, at $704 millions over the last twelve months. That also marks an improvement from $564 million at the beginning of the year, and also translates to a Free Cash Flow Yield of 8.67%.
Debt to Equity: ALK’s debt/equity ratio is conservative, at .66. As of the last quarter, the company reported almost $1.6 billion in cash and liquid assets against about $2.8 billion in long-term debt. Their healthy margin profile, and solid cash position means that operating profits are more than adequate to service the debt they have, while they also have good liquidity to provide additional flexibility.
Dividend: ALK’s annual divided is $1.40 per share, which translates to a yield of 2.12% at the stock’s current price. The dividend has also increased, from about $1.28 per share annually at the beginning of the year.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value. ALK has a Book Value of $34.49. That translates to a Price/Book value of 1.9, against a historical average Price/Book ratio of 2.92. That means that ALK is undervalued by almost 53% and puts the stock’s long-term “fair value” target price at about $101 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above displays ALK’s price performance over the last year. The diagonal red line traces the stock’s upward trend from April of last year to its peak at around $72 in November, and also serves as the baseline for the Fibonacci retracement lines on the right side of the chart. The stock has retraced from that peak to its current level a bit below $66, and is nearing support around the 38.2% retracement line at $65. A drop below that point could see the stock drop to new support at around $60.50 per share. A pivot low anywhere between the stock’s current price and $65, on the other hand could see the stock rally to a short-term peak at nearly $70 per share.
Near-term Keys: ALK’s retracement since early November constitutes a short-term downward trend; but against the backdrop of the longer-term upward trend also appears to offer a good technical, bullish set up, provided the stock bounces off of support. That would mark a good signal to buy the stock or work with call options, using $70 as a useful near-term target price. If the stock breaks below $65, take it as a signal to think about shorting the stock or working with put options as the stock extends the short-term downward trend into an intermediate period of time, with a useful target price in that case at around $60 per share.