American Airlines Group Inc. (AAL) is a network air carrier that provides scheduled air transportation for passengers and cargo. While pent-up travel demand continues to drive bookings, AAL cut more than 14,000 domestic flights from its December schedule as the carrier continues to reduce capacity due to a pilot shortage.

The cuts represent an 8% reduction in AAL's monthly schedule. AAL’s current schedule has the airline flying with 5.4% less capacity for the entire year than in 2019. In July, the company stated that it expects full-year capacity to be 7.5% to 9.5% lower than in 2019.

On the other hand, Alaska Air Group inc. (ALK), which offers passenger and cargo air transportation services and airline and hotel reservations, recently announced the addition of a new route to its existing operational routes. Beginning November 30, 2022, the company intends to offer nonstop flights between Everett and Anchorage.

In addition, last month, ALK announced a deal with Colorado renewable fuel producer Gevo Inc. to purchase 185 million gallons of biofuel over five years, beginning in 2026. The company’s shares have gained 6.4% over the past three months.

Travel and tourism demand has skyrocketed in the post-pandemic world, driving significant growth for the airline industry. The global domestic aviation market is anticipated to reach $1130.8 billion by 2027, registering a CAGR of 3.2%.

Given its ability to capitalize on industry tailwinds, we believe ALK is a better investment than AAL at the moment.

Here's what could shape ALK's performance in the near term:

Robust Financials

For the second quarter ended June 30, 2022, ALK's total operating revenue increased 79% year-over-year to $2.66 billion. Its operating income came in at $187 million. Its interest income grew 100% from the prior-year quarter. The company reported a net income of $139 million, while its EPS amounted to $1.09.

Impressive Growth Prospects

Street expects ALK's revenues and EPS to rise 61.3% and 319.2% year-over-year to $9.61 billion and $4.45, respectively, in fiscal 2022. In addition, ALK's EPS is expected to rise 61.9% in the current quarter ending September 2022 and 395.8% in the next quarter ending December 2022.

Discounted Valuation

In terms of non-GAAP P/E, the stock is currently trading at 10.45x, 34.5% lower than the industry average of 15.93x. Also, its forward EV/Sales of 0.68x is 58.9% lower than the industry average of 1.66x. Moreover, ALK's trailing-12-month Price/Book of 1.38x is 45.8% lower than the industry average of 2.55x.

Consensus Rating and Price Target Indicate Potential Upside

Of the seven Wall Street analysts that rated ALK, six rated it Buy, and one rated it Hold. The 12-month median price target of $64 indicates a 36.7% potential upside. The price targets range from a low of $45.00 to a high of $98.00.

POWR Ratings Reflect Solid Prospects

ALK has an overall grade of B, equating to a Buy rating in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. ALK has a B grade for Sentiment and Quality. Analysts’ solid earnings and revenue growth estimates are consistent with the Sentiment grade. In addition, the company's impressive financials are in sync with the Quality grade.

Of the 31 stocks in the D-rated Airlines industry, ALK is ranked #5.

Beyond what I stated above, we have graded ALK for Value, Stability, and Momentum. Get all ALK ratings here.

Bottom Line

ALK is expected to benefit significantly from the growing travel demand as the company continues to invest significantly in expanding its operational capacity. In addition, given the favorable analyst estimates, robust financials, and lower-than-industry valuation, we think it could be wise to invest in ALK instead of AAL, which is struggling to stay afloat.

How Does Alaska Air Group Inc. (ALK) Stack Up Against its Peers?

ALK has an overall POWR Rating of B, which equates to a Buy rating. Check out these other stocks within the same industry with B (Buy) ratings: Deutsche Lufthansa AG (DLAKY), Qantas Airway Limited (QABSY), and International Consolidated Airlines Group S.A. (ICAGY).

ALK shares were trading at $45.20 per share on Tuesday morning, down $1.62 (-3.46%). Year-to-date, ALK has declined -13.24%, versus a -15.56% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

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