Alaska Air (NYSE:ALK) continued its impressive comeback last quarter, reporting another quarter of margin expansion and strong earnings growth. Yet while Alaska Air shares rose 4.1% on Friday, the day after the earnings report, they gave up most of that gain on Monday, after a prominent analyst downgraded the stock on valuation concerns.

It's true that Alaska Air stock now trades at a premium to many other airline stocks. However, the stock remains extremely cheap by conventional valuation metrics. Moreover, Alaska Airlines has substantial room to grow earnings per share over the next few years, which could drive Alaska Air stock even higher.

Another excellent earnings report

Alaska Air's revenue reached $2.39 billion in the third quarter, up 8% compared to the prior-year period. The West Coast-focused airline increased its capacity 3.4% year over year last quarter and also grew revenue per available seat mile (RASM) 4.5%. This RASM increase came in near the high end of the carrier's initial guidance range, as revealed in a guidance update earlier this month.

Meanwhile, adjusted nonfuel unit costs rose 3.4%, with about half of that increase driven by one-time ratification bonuses related to new labor contracts. This was a better result than what management had projected three months ago. Finally, Alaska's average fuel price fell to $2.13 per gallon from $2.33 per gallon in Q3 2018.

An Alaska Airlines plane flying over clouds

Alaska Airlines' revenue growth far outpaced its cost increases last quarter. Image source: Alaska Airlines.

The net result was that adjusted pre-tax income soared 35% year over year to $421 million. Alaska's adjusted pre-tax margin reached 17.6%, up from 14.1% a year earlier. Adjusted EPS jumped 38% to $2.63, easily beating the average analyst estimate of $2.52.

A strong forecast, despite tough comparisons

Looking ahead to the fourth quarter, Alaska Airlines expects its revenue momentum to continue, with RASM rising 1% to 4% year over year. This forecast is particularly impressive because the airline will face much tougher comparisons this quarter than it has year-to-date. RASM rose 5.2% in Q4 2018, compared with a 0.1% decline in last year's third quarter and a 2.3% drop for the first three quarters of 2018 as a whole.

Cost trends will also improve this quarter. Alaska expects adjusted nonfuel unit costs to increase less than 1% year over year, while fuel costs are on track to average $2.16 per gallon: down from $2.35 per gallon in the fourth quarter of 2018.

Based on the midpoint of this forecast, revenue would come in right around $2.2 billion this quarter. Adjusted EPS would jump to around $1.30, compared to just $0.75 in Q4 2018. This would still be a bit lower than the average analyst estimate of $1.39, but there's a good chance that Alaska will surpass the midpoint of its guidance range, as it has in each of the past two quarters.

Plenty of catalysts left for 2020 and beyond

Alaska Air stock currently trades for about 11 times the company's projected 2019 earnings. While many other airline stocks are even cheaper, this is a dirt-cheap price by traditional standards.

Furthermore, Alaska Airlines has stronger earnings growth prospects than most of its peers, particularly for the next year or two. Management expects to reap approximately $125 million of incremental revenue from the carrier's existing revenue initiatives in 2020 -- with more coming in 2021 -- and chief commercial officer Andrew Harrison stated that the company will reveal additional revenue growth initiatives in January. Unit costs should stay in check next year, too, as capacity growth starts to accelerate again.

This outlook suggests that Alaska's long-term pre-tax margin target range of 13% to 15% should be within reach next year. (For comparison, the company is on track to finish 2019 with an adjusted pre-tax margin between 11% and 12%.) Based on the midpoint of that range, EPS could rise to between $7.50 and $8.00 next year, putting Alaska Air stock's valuation at just nine times forward earnings.

Alaska Air has also improved its balance sheet dramatically this year, which will allow it to start returning most of its free cash flow to shareholders in 2020 and beyond. To the extent that the company ramps up share buybacks, EPS could grow even faster. Management also hinted that Alaska could be within months of placing a major aircraft order, paving the way for it to replace its least efficient planes in the years ahead.

With so many potential catalysts, Alaska Air stock looks like it has plenty of room to run.