By Teresa Rivas
Alaska's long winter may be just beginning, but shares of the state's flagship airline may soon be heating up.
Melius Research analyst Conor Cunningham upgraded Alaska Air Group to Buy last week, citing his belief that it will benefit from changes in the airline industry. He believes that slower growth in capacity positions bigger players for better margins and higher earnings.
He reiterated that stance on Monday, writing that "everything appears to be aligning for Alaska," Cunningham believes the stock should rise to $62, nearly 30% about its level today.
Following Alaska Air's successful acquisition of Hawaiian Airlines, completed in September, he sees the former as the best domestic player in the industry, noting that the roughly 25% gain in the stock this year leaves it behind other winners like United Airlines and Delta Air Lines.
Cunningham thinks that could change, particularly after an investor day Alaska Air has scheduled for Dec. 10. That will be a chance for the carrier to highlight how the combined company stands to increase profitability.
"The company has a path to doubling," he wrote, "with an improving competitive environment, a strong product offering, and considerable network potential."
Alaska has one of the industry's best management team, Cunningham says, an advantage shown by the fact that though it focuses on domestic routes, its margins lead the industry. Peers with more exposure to international routes, which are usually more profitable, are struggling.
If Alaska Air can make its newly acquired Hawaiian routes perform equally well, that will further strengthen its position even before accounting for cost savings and other benefits from the merger, he says. Alaska Air easily surpassed its target for synergies for its 2016 acquisition of Virgin America.
At the same time, losses for the airline's rivals are gains for Alaska. Both JetBlue Airways and Southwest Airlines have reduced capacity or entirely exited areas on the West Coast, where Alaska and Hawaiian frequently fly. "Alaska is already seizing the opportunity, launching five new routes, and is also optimizing its Seattle and Portland hubs with the added flexibility gained from this acquisition," he wrote.
The deal will allow Alaska to become a bigger player outside its core markets. "What's especially intriguing, though, is the long-term boost in relevance this merger brings," he said. "Hawaiian is arguably the best-positioned airline from the West Coast to Hawaii, but it lacked appeal beyond...Alaska's integration will boost connectivity and loyalty, expanding its network reach and appeal with a premium product that makes Alaska highly attractive."
In all, the airline industry remains a tough business, but it may be entering a period when the stocks -- long known for disappointment and volatility -- will get a boost from fewer price wars and more rational growth in capacity. In that kind of environment, a larger, more successful Alaska looks poised to expand more profitably.
Nor is he the only one getting more optimistic. On Friday, Seaport Global analyst Daniel McKenzie maintained a Buy rating on Alaska while boosting his price target by $10 to $63, citing the company's upbeat third-quarter results.
In fact, 80% of the 15 analysts tracked by FactSet are bullish on the stock. The remaining three rate the stock at Hold, rather than Sell. The average price target of $55.75 implies a gain of nearly 17%.
"Alaska's potential is just beginning to shine," Cunningham said. It makes sense for a stock from the land of the midnight sun.
Write to Teresa Rivas at teresa.rivas@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 04, 2024 14:40 ET (19:40 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments