Value in Flight: Southwest and Alaska Air

09/08/2016 8:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

While the number of stocks with bargain-basement valuations is relatively low, you can still find pockets of value, asserts Richard Moroney. Here, the editor of Dow Theory Forecasts looks at favorite value idea — both airlines.

Uncertainties weigh on Alaska Air Group (ALK) shares, partly relating to its pending $2.6 billion acquisition of Virgin America (VA).

Detractors point to the deal’s hefty premium, integration risks, and possible credit downgrade. Virgin also has lower profit margins than Alaska Air, which has seen its shares slump since announcing the deal in April.

The shares trade at nine times trailing earnings (versus an industry average of eight) and 10 times estimated earnings for the 12 months ending June 2017 (nine).

Despite worries over the Virgin America deal, the stock’s modest premium to peers appears justified, considering its lack of exposure to economic troubles brewing in Europe and Zika fears in Latin America.

About 93% of its capacity was confined to the U.S. last year, with Mexico and Canada accounting for the remaining 7%. Alaska Air is a Long-Term Buy.

Southwest Airlines (LUV) shares slipped in August after the company tempered its September-quarter guidance, citing a July systems outage that delayed or canceled thousands of flights.

Per-share profits are still projected to rise 9% in 2016 and 3% in 2017, with sales up 4% both years.

The fourth-largest US airline by traffic, Southwest has historically traded at a significant premium to peers. It trailing P/E ratio has averaged a 27% premium to the average S&P 1500 airline stock in the past decade.

At nine times trailing earnings, Southwest shares currently trade just 16% above their industry-group average.

Also encouraging, the stock trades at nine times estimated 2017 earnings, roughly in line with the industry average. Southwest is a Long-Term Buy.

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