Fly with Alaska

02/12/2015 7:00 am EST

Focus: STOCKS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

This new recommendation happens to be the first airline stock I've ever owned, asserts Ian Wyatt, editor Million Dollar Portfolio.
   
Alaska Air Group (ALK) is one of the most well run airlines. Headquartered in Seattle (not Alaska), the airline has an extremely loyal customer base.

For the past seven years, J.D. Power surveys rank Alaska Air as the No. 1 airline in terms of customer satisfaction.
   
The company has been using its strong cash flow to benefit shareholders. Last May, Alaska announced a $650 share repurchase program. If completed, the buyback would represent 10% of the shares outstanding.

Stock buybacks are nothing new at Alaska Air. Since 2007, the airline has spent $519 million on share repurchases. A total of 21 million shares have been bought back thus far.
   
Unlike many of the major US airlines, Alaska Airlines' routes are 100% contained within North America. That insulates the company from weaker economies in Europe and emerging markets. Plus, it eliminates any currency risk.

Another tailwind for the stock in 2015 will be cheap oil. With crude oil falling 50% since last July, airlines will be saving lots of money. Those cost savings will fall directly to the bottom line, helping boost profits at nearly every airline.

After a strong showing for Alaska Air stock in 2014, you might expect the shares to be very richly priced. But that simply isn't the case. Today, Alaska Air stock trades at 12 times next year's EPS estimates.

It's quite possible that this company will experience 20% EPS growth in each of the next two to three years.

Meanwhile, the shares currently trade as 12 times 2015 EPS estimates. Yet the median company in the S&P 500 trades at 18 times earnings.

That depressed valuation is related to the poor sentiment toward airline stocks. Far too many investors have sworn that they'll never buy an airline stock. And they view the recent rebound as an unsustainable fluke. 

Yet, the simple fact of the matter is that airlines are actually becoming a good business. As the growth story of the airlines unfolds, more investors will wake up to the opportunity.

When that happens, I expect airline stocks will begin trading at valuations that are more in line with the overall stock market.

Meanwhile, the aggressive stock buyback program and low p/e should protect the share price on the downside.

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