On Monday, Melius Research upgraded Alaska Air Group Inc. (NYSE: NYSE:ALK) shares from Hold to Buy, setting a new price target of $56.00. The firm believes that the airline industry is entering a phase where stocks could significantly outperform due to the disciplined approach to capacity management that airlines are currently demonstrating.
The analyst pointed out that the airline industry is known for its volatility and challenging business environment. However, they noted that every few years, conditions become favorable for airlines to outperform the market. The current industry dynamics, particularly around capacity management, are seen as a positive sign for the sector. The disciplined capacity control is not by choice but necessity, as airlines strive to improve their margins.
During the second quarter of 2024 earnings season, there was skepticism about the longevity of the industry's capacity actions. However, with new insights into 2025 capacity plans, there is a belief that there could be room for positive earnings revisions.
The analyst cited potential for significant earnings growth for other airlines they cover, such as Delta and United, suggesting that the current price targets may only be the beginning if their predictions hold true.
Earlier in the year, Alaska Air was downgraded due to concerns that its acquisition of Hawaiian Airlines would be a distraction. The analyst did not anticipate the capacity rationalization from competitors like JetBlue and Southwest, which ended up benefiting Alaska's key markets on the West Coast. Southwest's recent earnings call highlighted the strong performance in the Hawaii market, which had previously been a challenge.
The acquisition of Hawaiian Airlines is expected to dilute Alaska's earnings by 22% in 2025, but the analyst is optimistic that Alaska's management can turn around Hawaiian's fundamentals. They are also looking forward to the investor day on December 10th for more details and potential upside to the initial synergy expectations.
In conclusion, the analyst's positive outlook on Alaska Air is supported by the potential synergies from the Hawaiian acquisition and the strength of Alaska's management team, which has a leading market share in the Pacific Northwest, California, and now Hawaii.
In other recent news, Alaska Air Group has been making notable strides in its financial and operational endeavors. The company reported a GAAP net income of $220 million and an adjusted net income of $327 million for the second quarter.
It has also launched a $1.5 billion financing initiative backed by its customer loyalty program, with the proceeds expected to be used for redeeming debts from its merger with Hawaiian Airlines and for general corporate purposes.
Alaska Air Group recently finalized its $1.9 billion merger with Hawaiian Airlines. The combined entity will continue to operate independently until a single operating certificate from the Federal Aviation Administration is secured, allowing the airlines to function as a single carrier. Analysts from Barclays and TD Cowen have expressed positive views on the merger, anticipating strong revenue and cost synergies.
In terms of analyst ratings, Susquehanna maintained a Neutral rating on Alaska Air Group shares but increased its price target to $45, while TD Cowen reduced its price target to $50 but maintained a Buy rating. Furthermore, Barclays initiated coverage on Alaska Air Group, assigning the stock an Overweight rating and setting a price target of $55.00. These ratings reflect recent developments in the company's financial position and future outlook.
InvestingPro Insights
Recent data from InvestingPro adds weight to Melius Research's upgrade of Alaska Air Group Inc. (NYSE: ALK). The company's P/E Ratio (Adjusted) for the last twelve months as of Q2 2024 stands at 11.98, which is relatively low compared to its projected earnings growth. This aligns with an InvestingPro Tip suggesting that ALK is "Trading at a low P/E ratio relative to near-term earnings growth."
Moreover, Alaska Air's revenue for the last twelve months as of Q2 2024 reached $10.52 billion, with a modest growth of 1.74%. This growth, albeit small, supports another InvestingPro Tip indicating that "Net income is expected to grow this year." The company's profitability is further underscored by its positive operating income of $724 million for the same period.
It is worth noting that ALK's stock has shown strong performance recently, with a 15.41% price return over the past three months. This trend aligns with the InvestingPro Tip highlighting a "Strong return over the last three months" and that the stock is "Trading near 52-week high."
For investors seeking more comprehensive analysis, InvestingPro offers additional tips and insights beyond those mentioned here. In fact, there are 11 more InvestingPro Tips available for Alaska Air Group, providing a deeper understanding of the company's financial health and market position.
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