Cowen & Co.'s airline analysts Helane Becker and Conor Cunningham have been quite busy lately.
Earlier this week, they cut their rating on budget carrier Spirit Airlines (SAVE), and upgraded JetBlue (JBLU) to Buy in late August. Today, they reiterated their Outperform rating and $58 price target on Alaska Air Group (ALK), writing that the company continues to post solid results despite a difficult macro environment—a fact that the market isn't fully valuing.
Becker and Cunningham write that lower cost trends speak to Alaska's ability to execute, and management's repurchase of 2.9 million shares in the second quarter alone speak to its shareholder friendly policies. While the competitive threat from Delta (DAL) is real, they write that it's overshadowing Alaska's strong numbers.
As such, they raised their third quarter EPS estimate by 4 cents to $1.40, and full-year EPS estimate by a nickel to $3.90—ahead of consensus in both cases.
From their note:
We believe Alaska Air’s shares are undervalued and among the cheapest stocks in our US airline universe. Alaska is currently trading at 4.9x 2015E EV/EBITDAR, compared to the group which is trading at 5.9x. Alaska has a history of strong execution and ability to defend their turf against tough competitors. Alaska has 47 unencumbered B737-800/900/900ER aircraft, which provides hidden value on the balance sheet. The company also has a net cash position of $651MM on the balance sheet. Given all the positive things at the company, the market appears to continue to miss it; as a result the company has aggressively bought back shares. Since the end of 2Q14 Alaska has bought back 2.9MM shares for a total of $133MM. Management will continue to support the shares with their open-ended $650MM share repurchase program.
Management forecasts non-fuel unit costs will be down 1.5% in the current quarter, compared to prior guidance of flat y/y. The decline in CASM ex. went unexplained, however we believe maintenance events were probably pushed out to 4Q14. The company has also seen improved productivity. Alaska has a history of mitigating cost inflation and we are not that surprised to see CASM ex. trend lower especially as capacity increased by 8%. Alaska forecasts jet fuel to be $3.17/gallon, down from prior guidance of $3.22/gallon. We aren’t surprised to see jet fuel trend lower as crude continues to come under pressure.
At recent check Alaska was rising—an anomaly among the air group, as only Delta and Southwest (LUV) were also in the black Friday afternoon.
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