Alaska Air (NYSE: ALK) has experienced a significant surge in net income, with a 300% year-over-year increase to $235 million in 2023, driven by higher revenues and lower fuel costs. Despite this positive development, the stock has seen a decline of 20% from early January 2021 to around $40 now, underperforming the S&P 500 which saw a 45% increase over the same period. Alaska Air has faced challenges in recent years, with the stock losing value in each of the last three years, indicating underperformance compared to the S&P 500.
Consistently beating the S&P 500 has been difficult for individual stocks in recent years, including heavyweights in the Industrials sector and megacap stars. However, the Trefis High Quality Portfolio, consisting of 30 stocks, has outperformed the S&P 500 each year. The current uncertain macroeconomic environment with high oil prices and elevated interest rates raises questions about whether Alaska Air could face further underperformance in the next 12 months or if it will see a recovery. From a valuation perspective, ALK stock appears attractive and is expected to see higher levels over time, with estimates suggesting a potential 35% upside.
Alaska Air has seen its pretax and net income margins expand in recent years, with reported operating income increasing from $675 million in 2021 to $837 million in 2023. However, its operating margin declined due to higher fuel and labor costs. Adjusted pretax income surged to $782 million in 2023, compared to a loss of $343 million in 2021, leading to an expansion in profit margins. Adjusted net income also rose from $256 million in 2021 to $583 million in 2023, resulting in a significant increase in per-share earnings over the same period.
In the previous quarter, Alaska Air experienced a contraction in consolidated adjusted pre-tax margin, resulting in a wider net loss per share due to the grounding of Boeing 737 MAX aircraft earlier in the year. Following an incident in which a cabin side panel detached midair, the FAA grounded the aircraft. Despite these challenges, Alaska Air expects its 2024 earnings to be in the range of $3.25 and $5.25 per share, compared to $4.53 in 2023. The company aims to expand its margin profile in the coming years by focusing on better network connections to generate higher yields.
While ALK stock appears undervalued, it is important to consider how Alaska Air’s peers are performing on key metrics. By analyzing peer comparisons, investors can gain valuable insights into the industry landscape and make informed investment decisions. Overall, Alaska Air’s strong performance in expanding its margins and increasing net income indicate potential growth opportunities for the company in the future, despite recent challenges and underperformance in the stock market.
