Alaska Air's Stock Faces Challenges Amid Inflation and Rates

A recent report reveals that Alaska Air's stock is struggling, down 45% from its 2021 highs. The company has lowered its EPS outlook and reported declining margins, which could indicate continued challenges and affect investor sentiment.

Date: 16-09-2024

AI Rating: 4

According to the report, Alaska Air (ALK) is currently trading around $40 per share, significantly below its pre-inflation shock peak of approximately $74. The report highlights a revenue growth from $6.2 billion in 2021 to $10.5 billion in the last twelve months, indicating a rebound in air travel demand post-pandemic. However, this growth comes with certain caveats; while revenue has increased, operating margins have contracted from 10.9% to 7.3% over the same period, which signifies that the costs are rising faster than revenues. This contraction in margins is concerning as it directly affects profitability.

In terms of profitability, the report notes that Alaska Air's reported earnings per share (EPS) fell to $1.76 over the last twelve months compared to $3.77 in 2021, pointing to a deteriorating earning situation.

The company has also made a conservative projection for its EPS for 2024, lowering it to a range of $3.50 to $4.50, down from previous expectations of $3.25 to $5.25. This downward revision adds pressure on investor sentiment, as it suggests that Alaska Air is not expecting to rebound significantly in the near term.

Furthermore, Alaska Air's financial stability is scrutinized with a reported debt of around $4 billion and cash reserves dropping from $3.1 billion in 2021 to $2.5 billion. Although the company generated $1.1 billion in cash flows from operations, the high debt relative to its market capitalization (80% debt-to-equity ratio) raises red flags about its financial vulnerability under prolonged economic stress.

Thus, while Alaska Air has shown potential for revenue recovery due to increased travel demand, the contraction in margins, reduced earnings, and heightened debt levels point towards a challenging environment that could adversely affect stock performance over the coming year.

Stocks: ALK LUV