3 Reasons Credit Suisse Upgraded Alaska Air

Credit Suisse’s Julie Yates believes that while the market is discounting for risks, it has been underappreciating the positives associated with Alaska Air Group, Inc. ALK.

Yates upgraded the rating on the company from Neutral to Outperform, while raising the price target from $70 to $85.

Reasons For The Upgrade

The analyst mentioned that there were three reasons for the upgrade in the rating: “(i) attractive relative valuation on pro forma estimates, (ii) improving unit revenue trends, (iii) upcoming catalysts as integration planning progresses & the deal closes in H2'16.”

Related Link: Alaska Air Q2 Adjusted EPS Rises 20.5%

Following the disappointment with Southwest Airlines Co LUV, Yates expects investors to look for “domestic rotation ideas,” and to find Alaska Air increasingly attractive at its current valuation levels.

The stock is currently the second least expensive one in Credit Suisse’s coverage universe, with the shares trading in-line with network carrier P/E multiples.

Well Positioned

“We see support for sequential improvement in ALK unit revenue (PRASM) trends in H2, differentiating it from network carriers & LUV where Q/Q improvement is again elusive in Q3,” the analyst stated.

Yates also pointed out that with Alaska Air being 93 percent domestic and exposed to geographies with some of the highest GDP, the company was well positioned to see the best corporate and leisure traffic.

In addition, the company has 16 percent exposure to Hawaii, where the analyst noted unit revenue trends were among the best in the U.S.

Yates expects the Virgin America Inc VA deal to close by 4Q16.

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