Alaska Airlines (ALK)
Enterprise Value = $9.566 billion
Operating Income = $1.508 billion
EV/Operating Income = 6.34x
Earnings Yield = 9%
Price/Revenue = 1.16x
Debt/Equity = 77%
Debt/EBITDA = 1.79x
Alaksa Airlines is a holding company that owns a portfolio of Airlines: Alaska, Virgin America (purchased in December 2016) and Horizon Air. They are the 5th largest airline in the United States. They fly to 118 destinations and are the industry leader for on-time performance. Their focus is on low fares and timely service. A bulk of their business (34%) supports West Coast travelers.
Year to date the stock is down 21%. In general, airlines are considered to be a terrible business. The business is brutally competitive. Most airline passengers look primarily at the bottom line and view the product as a commodity. There is very little commitment to one brand over another. Airlines are also sensitive to swings in oil prices, which can be severe. For Alaska in particular, this year they ran into trouble with their Horizon Air unit. A number of pilots quit (likely for pay increases at competing airlines) and this resulted in the cancellation of flights and a dip in revenue. The recent merger with Virgin has also consumed much of the airline’s attention. Crude oil prices also appear to be on the upswing, which could pose trouble for the company.
Airlines are historically a brutal business, but this appears to be changing. Warren Buffett famously hated the airline industry, but recently he has changed his tune and Berkshire bought a basket of airlines. Berkshire did this after Ted Wechsler researched the business after seeing a presentation from American Airlines. Doug Parker, the CEO of American, argued that increased consolidation is ending the brutal price competition that used to plague airlines. In other words: the airline business is turning into an oligopoly. This is bad news for airline passengers, but good news for shareholders in airlines.
In the past, airlines historically took on dangerously high levels of leverage. That is changing and the debt profile of the airline industry is not risky. There are many airlines today sporting low debt/equity and low debt/EBITDA ratios and Alaska Airlines is one of them.
As a business, airlines grow with the economy. Total air revenue passenger miles recently hit an all-time high in July 2017. For Alaska Airlines, in particular, growth has been robust. Revenues grew from $5.1 billion in 2013 to $5.931 billion in 2016. They also boast an impressive return on invested capital at 21%.
Oil is a problem, but due to the positions that I haven in international indexes that will benefit from rising oil prices, I think the two positions complement each other nicely.
PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings. Read the full disclaimer.