We came across a bullish thesis on Alaska Air Group, Inc. (NYSE:ALK) on ValueInvestorsClub by martin92. In this article, we will summarize the bulls’ thesis on ALK. The company’s shares were trading at $74.43 when this thesis was published, vs. the closing price of $53.94 on Mar 14.

An aerial view of a Hawaiian Airlines plane flying high overhead, with a stunning view of an island below.

ALK operates airlines through its three segments: Alaska Airlines, Hawaiian Airlines, and Regional. The company offers scheduled air transportation services on Boeing jet aircraft for passengers and cargo in the United States and in parts of Canada, Mexico, Costa Rica, Belize, Guatemala, and the Bahamas.

The profitability of the airlines industry has been under pressure due to a capacity growth from lower cost carriers. With constraints in aircraft production, these airlines are no longer able to expand rapidly, eliminating the cost advantage and creating negative cash flows. ALK should benefit from a rationalization of supply and an increase in pricing.

The revenue composition has also worked in favor, with the demand for premium seats growing. This trend has eaten into the market share of ULCCs and LCCs, providing opportunities for margin expansion. The investment in lounges, new terminals, maintenance facilities and concourses is also paying dividends and offers a diversified and highly profitable proposition. This is another area where ALK is ahead of low-cost carriers that have not been able to capitalize on non-aircraft opportunities due to their stressed balance sheet.

The recent acquisition of Hawaiian Holdings at a revenue multiple of 0.7x is also an attractive bet that offers better outreach and better international exposure. This deal should result in $1 billion in incremental profits due to synergies ($500 million) and improved commercial strategy ($500 million). ALK expects pretax margins to be 11-13% with an EPS of $10 in 2027.

The expected EPS does not factor in buybacks and margin expansion which could see EPS rise to $13-15 by 2028. A higher EPS is also a more likely scenario due to expected demand growth likely to surpass the supply rate, enabling operators like ALK to sustain if not improve their operating margins. With a conservative forward earnings multiple of 11x, the fair value of ALK should be in the range of $143-165, reflecting an upside of 164-205% in the next three years.

While we acknowledge the potential of ALK as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than ALK but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.