In an industry notorious for poor customer service and inefficient management, Alaska Air Group (NYSE: ALK ) flips both scripts, and its outstanding performance continues to reward shareholders. Alaska Air Group is a holding company for Alaska Airlines and Horizon Air. Its stock has appreciated 87% in the past year, largely attributed to the rise of the entire airline industry. However, Alaska still stands out from the crowd for many reasons. The company's efficient management, which is dedicated to rewarding both customers and shareholders, has done a great deal to optimize its operations. Alaska Airlines' attractive valuation, top-ranked customer service, and excellent management make the stock very attractive.
Alaska Airlines' heap of coveted awards provides ample evidence for the great service it provides its customers. These include a first place ranking atop The Wall Street Journal's "Best (and Worst) Airlines" list, which ranks nine carriers based on factors such as on-time arrivals, cancellations, and passenger complaints, and, for the seventh year in a row, an award from J.D. Power for the highest customer satisfaction among North American airline carriers. Alaska's reputation for great customer service showcases its operational efficiency and likely will continue to attract customers, scoring profits for years to come.
Looking at the company's balance sheet, the airline's industry-leading profit margins and lack of debt provide additional evidence for its exceptional management. The company is extremely capable of managing costs and debt, and growing revenue. Alaska Air Group achieved a pre-tax margin of 12.4% in 2013, the third highest in its industry, as well as a return on invested capital of 13.6%, which ranked second. Additionally, it achieved an astounding 30% return on equity. Alaska Air Group has surprisingly little debt for an airline company. It has slashed its debt from $1.8 billion in 2009 to less than $900 million in 2013. Its debt to equity ratio is 0.4 and its current ratio is 1.1, providing security for when something unexpected occurs, as well as extra cash to reinvest in the company or return to shareholders. In comparison, competitors Jet Blue and Delta Air Lines have debt to equity ratios of 123 and 94, respectively. Alaska's efficient management has ensured fluid revenue and earnings growth. Despite turbulence in the airline industry, the company has been profitable for the past 10 years. Alaska Air Group's revenue stands at $5 billion, with net income of $508 million. Quarterly EPS doubled from Q1 2013 to Q1 2014, primarily due to revenue growth, cost-cutting and share repurchases. Alaska Air Group's management's extremely efficient performance has created both stability and growth.
Additionally, returns on Alaska Air stock will be fueled by management's commitment to giving back to shareholders. The company consistently grows its dividend and buys back shares. It initiated a dividend of $0.20 in Q3 2013 and increased its payment to $0.25 this year. Investors can take advantage of a potential dividend growth opportunity by investing in Alaska Air stock; its payout ratio is a measly 8%, which leaves plenty of room to grow. Additionally, Alaska Air Group has been aggressively buying back stock. The company approved a $650 million share repurchase program, representing almost one-tenth of its market capitalization. The airline's initiatives for rewarding shareholders provide further justification for optimism about the stock's future gains.
Lastly, Alaska Air's market capitalization does not justify its true value. The company is very stable, as evidenced by its high margins and lack of debt, and has a track record of revenue and profit growth. In addition, management juices returns by growing the dividend and buying back stock. Despite the factors I outlined in this article, Alaska stock trades at a low price to earnings ratio of 12.87, far less than the P/E of the S&P 500, which stands at 17, as well as the S&P Transportation ETF's multiple of 16. Valuing the company based on its growth, Alaska Air has a price to earnings growth ratio (PEG Ratio) of 0.88. Any valuation under one is considered undervalued. With EPS forecasted to grow 14% over the next five years, Alaska stock can appreciate both through earnings growth and multiple expansion.
To summarize, Alaska Air Group stands out in both the airline industry and the market as a whole due to its outstanding customer service, excellent management and ability to reward shareholders. These factors clearly invalidate the stock's modest valuation. In a market like this, finding a high quality business like Alaska Air Group at such a low price is extremely rare. When assessing an investment, I look for three characteristics: disruption of an industry or sector, highly efficient management and undervaluation. Alaska Air fits into all three groups, making both the company and its stock very attractive.
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