If the majority of Wall Street and the investing world is playing in one corner of the room, it’s best to put yourself in time out. For the airline industry, the big news this week will be the nearly completed merger of US Airways Group, Inc. (NYSE:LCC) and American Airlines. The two will form to be the biggest bird in the sky, delighting some investors while frightening others. But while the analysts and pundits debate the merits of the new uber-airline, the wise investor ought to look at this much smaller airline that is growing quickly and profitably, all while offering investors a frequent-flyer discount on its shares.
A profitable airline?
Airlines have been plagued investments since Benjamin Graham told us they were decades ago. I’m not actually saying he is to blame, as you could throw a rock down Main Street and hit six better-managed businesses than your average airline. But still, theories tend to be inelastic in the investment world — sometimes to its own detriment.
The truth is you can make money off airlines — just don’t choose bad ones. As with many an industry, some of the best airline stocks are the ones far away from the headlines, with only one or two analysts, and that seem at first glance to be uninteresting businesses. This airline is not what most would expect to be a quickly growing business. But in reality, it is expanding brilliantly, with good discipline and industry-leading margins while at the same time increasing its passenger revenue per available seat mile, or PRASM, a crucial number when analyzing this kind of company. These strong qualities, possibly the best among its peers, are in direct contradiction with the company’s stock price — trading at lower multiples than the others while offering the most upside potential.
It’s no secret among industry insiders and watchful investors that Alaska Air Group, Inc. (NYSE:ALK) is about as good a value as you can get in the growth airline sector.
Unfortunately, we’re about a year too late for the deep value bargain that was Alaska Air. The stock gained more than 30% last year based on some of the fundamentals I’ve already mentioned. The financials have been looking great for some time. Since 2009, the company has grown its cash flow from operations by 68% — pretty remarkable for any niche airline.
Alaska Air, while growing its routes, has been able to increase its PRASM. In the last reported quarter, PRASM was up $0.10 over the year-ago quarter. For all of 2012, that number grew by $0.31 — a very attractive figure. Compare that with a peer — Allegiant Travel Company (NASDAQ:ALGT) . Allegiant operates in a slightly different business (it’s a travel booker as opposed to pure airline), but it is also a growing smaller airline. In Allegiant’s recent earnings release, its PRASM shrank by more than 10% from the year-ago quarter. On a yearly basis, the number was down by 5%.
When airlines are focused on growth, they often put the PRASM on the back burner temporarily for the sake of overall numbers growth. Alaska Air Group has successfully grown its routes and planes while keeping consistent or growing profitability. Mark one notch next to company management for this one.