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Alaska Air Stock Plunges 12% in 3 Months: Should You Buy the Dip?
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Shares of Seattle, WA-based airline heavyweight Alaska Air Group, Inc. (ALK - Free Report) have not had a good time on the bourses of late, declining in double-digits over the past 90 days. The disappointing price performance resulted in ALK underperforming its industry in the said time frame as well as the S&P 500, of which the airline is a key member. However, ALK’s price performance compares favorably with that of fellow U.S. airline operators United Airlines (UAL - Free Report) and Delta Air Lines (DAL - Free Report) in the same time frame.
Three-Month Price Comparison
Image Source: Zacks Investment Research
Currently trading at $35.78, the stock rebounded 16.35% from its 52-week low of $30.75 on Nov. 1, 2023. However, it still reflects a significant discount of 22.47% from its 52-week high of $46.15 reached on April 22.
In fact, Alaska Air shares have plummeted 40.3% over the past five years.
Given the significant pullback in ALK’s shares currently, investors might be tempted to snap up the stock. But is this the right time to buy ALK? Let’s find out.
ALK’s Bearish Guidance for the Current Year
Last month, Alaska Air reported lower-than-expected revenues for the second quarter of 2024. Additionally, the airline trimmed its earnings per share forecast for 2024, citing the impacts of the newly signed tentative agreement with flight attendants and moderating domestic revenue environment.
The practice of price cuts by low-cost carriers, as they struggle to fill the excess seats this summer, is hurting even bigger rivals. Discount carriers have added too many seats that they are now attempting to fill by lowering fares and compelling airline majors to do the same to stay competitive. This phenomenon dampened Alaska Air’s pricing power. ALK now anticipates 2024 earnings per share between $3.50 and $4.50 (prior view: $3.25 and $5.25). The Zacks Consensus Estimate of $4.08 lies within the updated guidance.
Capacity (measured in available seat miles) for 2024 is now expected to increase less than 2.5% (prior view: less than 3%) from 2023 actuals.
Rising Expenses Weigh on Alaska Air Stock
Apart from the pricing and capacity woes, rise in labor and airport costs are also likely to dent bottom-line growth by resulting in a spike in operating expenses. Evidently, operating expenses were up 2% during the first half of 2024.
The surge in operating expenses was mainly caused by an increase in labor costs and fuel expenses. Expenses on wages and benefits increased 7% in the first half of 2024 over 2022 actuals. Consolidated operating costs per available seat mile (excluding fuel and special items) rose 4% year over year to 10.67 cents in the first half of 2024.
The ongoing production cuts adopted by major oil-producing nations and geopolitical tensions are pushing up fuel costs. As fuel expenses represent a key input cost for any airline player, the uptick in these costs naturally does not bode well. Notably, the economic fuel cost per gallon increased 3% in second-quarter 2024 to $2.84. For third-quarter 2024, economic fuel price per gallon is expected to be in the $2.85-$2.95 per gallon range, which is again higher than the reported figure in the second quarter.
Given the headwinds surrounding the stock, earnings estimates have been southbound, as shown below.
Image Source: Zacks Investment Research
Upbeat Air Travel Demand: A Major Tailwind
Strong passenger volumes bode well for ALK. While air travel demand is particularly strong on the leisure front, business travel has also made an encouraging comeback. Driven by the air travel demand strength, ALK’s top line increased 2% year over year in the first half of 2024. This was driven by a 2% rise in passenger revenues.
To meet the upbeat demand, ALK is boosting capacity. For third-quarter 2024, the company expects capacity to increase in the range of 2-3% from third-quarter 2023 actuals.
From a valuation perspective, ALK is trading at a discount compared to the industry, going by its forward 12-month price-to-sales ratio. The reading is also below its median over the last five years. The company has a Value Score of A.
Image Source: Zacks Investment Research
To Conclude
It is understood that ALK stock is attractively valued and upbeat passenger revenues are contributing to ALK’s top line. However, given the abovementioned headwinds, we believe that it is not at all advisable to buy the dip in this Zacks Rank #3 (Hold) stock until the company demonstrates substantial improvement in its performance. We believe investors should monitor the company’s developments closely for an appropriate entry point. For those who already own the stock, it will be prudent to stay invested. The stock’s Zacks Rank supports our thesis.
Image: Bigstock
Alaska Air Stock Plunges 12% in 3 Months: Should You Buy the Dip?
Shares of Seattle, WA-based airline heavyweight Alaska Air Group, Inc. (ALK - Free Report) have not had a good time on the bourses of late, declining in double-digits over the past 90 days. The disappointing price performance resulted in ALK underperforming its industry in the said time frame as well as the S&P 500, of which the airline is a key member. However, ALK’s price performance compares favorably with that of fellow U.S. airline operators United Airlines (UAL - Free Report) and Delta Air Lines (DAL - Free Report) in the same time frame.
Three-Month Price Comparison
Currently trading at $35.78, the stock rebounded 16.35% from its 52-week low of $30.75 on Nov. 1, 2023. However, it still reflects a significant discount of 22.47% from its 52-week high of $46.15 reached on April 22.
In fact, Alaska Air shares have plummeted 40.3% over the past five years.
Given the significant pullback in ALK’s shares currently, investors might be tempted to snap up the stock. But is this the right time to buy ALK? Let’s find out.
ALK’s Bearish Guidance for the Current Year
Last month, Alaska Air reported lower-than-expected revenues for the second quarter of 2024. Additionally, the airline trimmed its earnings per share forecast for 2024, citing the impacts of the newly signed tentative agreement with flight attendants and moderating domestic revenue environment.
The practice of price cuts by low-cost carriers, as they struggle to fill the excess seats this summer, is hurting even bigger rivals. Discount carriers have added too many seats that they are now attempting to fill by lowering fares and compelling airline majors to do the same to stay competitive. This phenomenon dampened Alaska Air’s pricing power. ALK now anticipates 2024 earnings per share between $3.50 and $4.50 (prior view: $3.25 and $5.25). The Zacks Consensus Estimate of $4.08 lies within the updated guidance.
Capacity (measured in available seat miles) for 2024 is now expected to increase less than 2.5% (prior view: less than 3%) from 2023 actuals.
Rising Expenses Weigh on Alaska Air Stock
Apart from the pricing and capacity woes, rise in labor and airport costs are also likely to dent bottom-line growth by resulting in a spike in operating expenses. Evidently, operating expenses were up 2% during the first half of 2024.
The surge in operating expenses was mainly caused by an increase in labor costs and fuel expenses. Expenses on wages and benefits increased 7% in the first half of 2024 over 2022 actuals. Consolidated operating costs per available seat mile (excluding fuel and special items) rose 4% year over year to 10.67 cents in the first half of 2024.
The ongoing production cuts adopted by major oil-producing nations and geopolitical tensions are pushing up fuel costs. As fuel expenses represent a key input cost for any airline player, the uptick in these costs naturally does not bode well. Notably, the economic fuel cost per gallon increased 3% in second-quarter 2024 to $2.84. For third-quarter 2024, economic fuel price per gallon is expected to be in the $2.85-$2.95 per gallon range, which is again higher than the reported figure in the second quarter.
Given the headwinds surrounding the stock, earnings estimates have been southbound, as shown below.
Image Source: Zacks Investment Research
Upbeat Air Travel Demand: A Major Tailwind
Strong passenger volumes bode well for ALK. While air travel demand is particularly strong on the leisure front, business travel has also made an encouraging comeback. Driven by the air travel demand strength, ALK’s top line increased 2% year over year in the first half of 2024. This was driven by a 2% rise in passenger revenues.
To meet the upbeat demand, ALK is boosting capacity. For third-quarter 2024, the company expects capacity to increase in the range of 2-3% from third-quarter 2023 actuals.
From a valuation perspective, ALK is trading at a discount compared to the industry, going by its forward 12-month price-to-sales ratio. The reading is also below its median over the last five years. The company has a Value Score of A.
Image Source: Zacks Investment Research
To Conclude
It is understood that ALK stock is attractively valued and upbeat passenger revenues are contributing to ALK’s top line. However, given the abovementioned headwinds, we believe that it is not at all advisable to buy the dip in this Zacks Rank #3 (Hold) stock until the company demonstrates substantial improvement in its performance. We believe investors should monitor the company’s developments closely for an appropriate entry point. For those who already own the stock, it will be prudent to stay invested. The stock’s Zacks Rank supports our thesis.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.