When is Alaska Airlines worth more than American Airlines?

Discussion in 'Alaska Airlines | Mileage Plan' started by beckoa, Mar 5, 2011.  |  Print Topic

  1. beckoa
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    beckoa Gold Member

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    Came across this news article and thought some would find it of interest...
    :D

    Also of interest is to compare AS' Market Value to some other carriers out there...
     
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  2. flytoeat
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    flytoeat Active Member

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    ALK is right near the top of my list of stocks I wish I'd purchased 12-18 months ago.
     
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  3. seaflyguy
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    seaflyguy Silver Member

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    To save everyone the trouble, market caps as of yesterday's close (P/E ratios in parentheses):
    • ALK: $2.10B (8.57)
    • AMR: $2.05B (N/A)
    • DAL: $8.27B (14.16)
    • JBLU: $1.63B (17.77)
    • LCC: $1.34B (3.17)
    • LUV: $8.82B (19.34)
    • UAL: $7.31B (20.63)
    Looking over this list, I find myself in broad agreement with the market's valuations in all cases except for ALK. Even after its run-up over the last year (approximately 4x), it still looks undervalued to me. I don't know how one can justify a P/E of 14.2 for DAL but only 8.6 for ALK. Or perhaps most saliently, a P/E of 17.8 for JBLU. Compare the two:
    • 2010 passengers: ALK 23.3M, JBLU 24.3M
    • Revenue: ALK $3.83B, JBLU $3.78B
    • Return on Equity (ttm): ALK 25.4%, JBLU 6.06%
    • Long-term debt: ALK $1.31B, JBLU $2.85B
    One or both of these airlines is being misvalued by the market. Either ALK is too low, JBLU is too high, or both.

    I've been an investor in ALK in the past, though I don't currently hold any shares. This exercise is making me think strongly about jumping back into ALK.
     
  4. eponymous_coward
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    eponymous_coward Gold Member

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    I think the market's a bit under on LCC, looking at that list. US, "ugly girl" though they may be, unlike AA, actually made a full-year profit in 2010 (almost half a billion), actually have improved their cash position year-over-year, actually have dramatically improved performance numbers (on-time, baggage handling). I don't think they are as ugly as everyone makes them out to be.
     
  5. AtomicGardener
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    AtomicGardener Silver Member

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    :) no comment.
     
  6. tassojunior
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    tassojunior Silver Member

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    Fuel matters most.

    The airlines that hedged fuel during low markets show a high P/E but will make a bundle if fuel prices go up.
     
  7. fooko2002
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    fooko2002 Active Member

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    There has been higher than average coverage of ALK from analysts recently and I am with @seaflyguy and thinking I shouldn't have sold my ALK stock when it doubled from when I purchased. :)

    I definitely think while there have been complaints regarding some decisions that AS/QX/AAG have made the last couple of years from a customer perspective, it has been clear that management is laser focused on improving the financials of the company and continue its path of profitability from the brink of bankruptcy it was at in early 2000s.
     
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  8. bakedpatato
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    bakedpatato Gold Member

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    I'm glad I held ALK (bought around April last year) but poor HA's been holding steady...
    You can't blame the AAG guys for wanting to make AAG's fiscal house a fortress , one wrong move and UA/AA/DL will swoop in and buy out the company...
     
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  9. Tvilum
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    Tvilum Silver Member

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    Bolding mine.

    If this is the case, how about going long in ALK and short in JBLU?
     
  10. Seacarl
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    Seacarl Gold Member

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    I also find myself broadly in agreement with the valuations. I think what's missing in your analysis is that the market is also making its assessment about how things will change going forward. The market may be saying that ALK is being run fairly optimally already, and that it will be difficult for ALK to grow its earnings substantially - hence the relatively low P/E on the relatively high earnings. Whereas they think the there is a lot of room to improve JBLU's performance - maybe by route optimization and pricing improvements - so that justifies the higher P/E. Or to put it another way, on the price-to-revenue ratio, ALK is valued about 50% more, given that the revenues are virtually equal.
    Perhaps UCH's (I think that's the ticker for UACO) high P/E is based on the expectation of significant synergies from their merger, plus the significant network value of the Star Alliance, and in both UCH & DAL's cases, their international strength which has a higher margin and less susceptibility to LCC competition.
    And the extremely low AMR valuation due to expectations of negative impacts from its labor relations, the poor fuel economy of its MD-80's, and the relative weakness of its network, especially in Asia as well as domestically, and the fact that it has few attractive prospects to remain competitive with UCH & DAL.
     
  11. jackal
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    jackal Gold Member

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    I'm not normally one to base investment decisions on random chatter on an IBB, but y'all are makin' me rethink my previous steadfast opposition to investing in the airline industry. ;)
     
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  12. bakedpatato
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    bakedpatato Gold Member

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    No, stay out of the airline industry...Boeing's losses, combined with heavy reliance on fuel prices on the airline's part makes airline and Boeing's stock bad buys....That said...I'm glad I picked up AAG....mad that I picked up HA
     
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  13. jackal
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    jackal Gold Member

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    Ah, sanity has been restored. ;)
     
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  14. seaflyguy
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    seaflyguy Silver Member

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    It's something I had considered. However, I do all of my investing in my retirement account, and I have a personal rule to never trade in options there... just too much risk.
     
  15. seaflyguy
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    seaflyguy Silver Member

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    To each his or her own, but I have been very happy with my purchase of BA (Boeing in Wall Street-speak) shares. I bought in July 2009, at $40.25, when they were being punished for yet another 787 delay. My reasoning was that at some point the delays would end, the aircraft would be certified, and the market would remember that, oh, yes, Boeing has sold more pre-launch options for the 787 than any airliner in history (677 at public unveiling; now 847). BA is now at $71.05 despite the continuing delays, so I'm going to ride it for a while longer.
     
  16. Seacarl
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    Seacarl Gold Member

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    Selling short does not involve trading options. Short selling is generally considered a risky or speculative trade, and your potential loss is unlimited. However in a hedged transaction, where you have an equal amount of long in ALK and short in JBLU has reduced the risk. The theory is that if the airline industry as a whole goes up or down (say in response to oil price changes, war or a terrorist attack) you won't be much affected since both positions should change roughly the same amount. However you would gain if ALK outperforms JBLU. I do think there is a risk in this, however, since ALK's profit margin is more than double JBLU's on similar revenue. If JBLU increases its profitability and ALK doesn't, then JBLU could close the gap on ALK and you would lose money on that bet. The market may have them fairly valued relative to each other based on current information and future expectations.
     
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  17. seaflyguy
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    seaflyguy Silver Member

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    Absolutely no disagreement on UAL (it's still UAL) and AMR.

    As for ALK versus JBLU, I think what you're saying is that the market is saying, in effect, "Well, ALK and JBLU, you're both about even in most statistical snapshot measures, but ALK, you're better run, so we're going to value JBLU more highly because if they were better run, they'd be even bigger." That would strike me as a fairly clear case of market irrationality. And markets are irrational on a regular basis, so it's quite possible you're right... which makes me want to buy ALK even more, since irrational valuations are nearly always eventually discovered and corrected.
     
  18. seaflyguy
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    seaflyguy Silver Member

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    Sorry, I misspoke with the word "options". What I meant to say, if it weren't still early here, was that I don't trade in my retirement account where I can lose more than the value of the security, or where the loss of the entire investment is a reasonable possibility. Thanks for the correction.
     
  19. bakedpatato
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    bakedpatato Gold Member

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    Yup,it really depends on how long term you are...:)
    Better off investing in your homegrown energy companies!
     
  20. beckoa
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    beckoa Gold Member

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    Well isn't there a company out there who one can earn miles with for trades... would be an interesting way to get a few shares of ALK... and I too wish I snagged some when it was even 20 bux a share... now if silly oil would stabilize that would be nice...
     
  21. Seacarl
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    Seacarl Gold Member

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    That's not quite what I was trying to say.
    Yes, Alaska and JBLU are similar on many statistical snapshots, particularly on revenue and pax. However on profitability they diverge widely. JBLU has a 2.6% profit margin and $98 million in income. And a market cap of $1.6 billion. ALK has a profit margin of 6.55%, $251 million in income, and a market cap of $2.1 billion.
    So the market is already valuing ALK about 32% higher than JBLU by giving it the higher market cap. When you look at the P/E, you say, why is ALK's P/E so low? Well it is because ALK's profit margin is pretty darn good for the airline industry, and there's probably little room for them to improve their profit margin. JBLU's profit margin is not so good, so if they can operate better, then can grow net income more easily than can ALK. JBLU has more ways to improve - and the market already thinks ALK is worth more than JBLU.
    Personally I think JBLU wil end up being the best merger candidate for American if American can figure out its labor. There would be a lot of integration issues, but the route systems and hubs would fit together.
     
  22. seaflyguy
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    seaflyguy Silver Member

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    I really think we just said the same thing.
     
  23. beckoa
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    beckoa Gold Member

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    Hmm that's an interesting thought... B6 and AA... they do have a partnership already. And keeps AS independent [​IMG]
     
  24. Seacarl
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    Seacarl Gold Member

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    I don't think AS is a good fit for AA's route system, and if you introduced AA's costs onto AS's routes, I don't think the routes are viable any more. AA has already failed on the west coast twice with the acquisitions of Air Cal and later Reno Air. The reasons that I think JBLU is a better fit for AA include AA's relative strength in NY and the East Coast & Caribbean, and the fact that NY generally has more constraints on competition (slot controls and limited gates).
    If AS were to merge with someone, seems like AS would fit better with DL's route system and transpacific service. But even that merger could prove difficult.
     
  25. AKGUY
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    AKGUY Silver Member

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    All of this would be dependent on AS wanting to merge, which they have stated, over and over again, they have no intention of doing. AS house is in very good order compared to most out there. If anything, I would see them acquiring, not merging.Semantics, YES, but.....
     

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