Bear of the Day: Alaska Air Group (ALK)

The travel industry has been battered by a series of unusually powerful tropical storms over the past few months, with Hurricanes Harvey and Irma causing billions of dollars in damage and creating massive headaches for several airlines.

Alaska Air's (ALK) largest hubs are located on the West Coast, so this company hasn't been particularly affected by these storms. Nevertheless, management has struggled with several other key challenges recently.

Alaska Air Group is currently a Zacks Rank #5 (Strong Sell). The company operates the Alaska Airlines and Horizon Air brands, as well as the recently-acquired Virgin America airline. Shares are down nearly 10% year-to-date, and on top of its weak Zacks Rank, Alaska Air is carrying an "F" grade in the Momentum category of our Style Scores system ahead of its report.

Recent Challenges

There doesn't seem to be much positive momentum in the airline industry, and as mentioned, several hurricanes have devastated a handful of the biggest players. In fact, our "Transportation - Airline" group currently sits in the Bottom 6% of the Zacks Industry Rank. But what's really interesting here is that Alaska Air is dealing with its own problems.

For one, a contractual dispute has led to a significant pay increase for pilots at the company's Horizon Air subsidiary. Moreover, fuel cost per gallon in the third quarter is expected to come in nearly 12% higher than the year-ago period.

Alaska Air also recently released mixed September traffic results. The company's total revenue passenger miles (RPMs) were up by nearly 8.4%, while its consolidated capacity gained 10.1%. What's problematic is that load factor, or percentage of seats filled by passengers, fell nearly 1.5 percentage points year-over-year, underscoring the fact that capacity expansion has outpaced traffic growth.

Earnings Outlook

ALK is slated to release its full third-quarter financial results before the market opens on October 25. As we can see, the company has seen significant negative revision activity, and estimates are down on near-universal analyst agreement across the board.

If these estimates hold up, Alaska Air's results would represent earnings growth of 5.60% and revenue growth of 38.33%. This indicates that ALK is perhaps a more interesting growth pick than many others in the airline business, but it could present even more risk if the company fails to live up to expectations.

On that note, we should mention that Alaska Air currently sports an Earnings ESP of -3.40%. Zacks Earnings ESP (Expected Surprise Prediction) looks to find earnings surprises by focusing on the most recent analyst estimates.

Alaska Air's negative Earnings ESP further proves that analyst sentiment has gotten worse during recent trading, which is not a great sign as we approach the company's earnings report date.

Other Key Metrics

As mentioned above, ALK is currently sporting an "F" grade for Momentum. The stock has its negative estimate revision snapshot, as well as its weak share price movement over the past few months, to thank for this grade. In fact, the stock has underperformed the industry's average gains throughout the past year, within 2017, and over the past three months.

On top of this, a few of Alaska Air's valuation metrics might leave investors concerned. The company's P/S ratio of 1.43 is well ahead of the industry average of 0.81, and its PEG ratio is at a significant premium to the industry's 1.53. What's more, ALK's P/B and P/CF ratios are currently lagging behind their respective industry averages.

Better Options

Because of the aforementioned storms and rising fuel costs, investors will find very few surefire bets in the domestic airline industry right now. Instead, it might be a good idea to turn our attention to several foreign airliners.

For investors interested in this space, Hong Kong-based Cathay Pacific Airways (CPCAY) is sporting a Zacks Rank #2 (Buy), and German behemoth Lufthansa (DLAKY) currently has a Zacks Rank #1 (Strong Buy).

Make sure to check back here at Zacks for the latest on Alaska Air, as well as the rest of the travel sector, as we head further into Q3 earnings season!

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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