Alaska Air Initiated In Line At Imperial Capital

Imperial Capital started coverage of Alaska Air Group, Inc. ALK with an In-Line rating and price target of $74, about 12 percent above the recent share price.

"While the pending acquisition of Virgin America Inc VA would potentially provide ALK with longer-term growth opportunities, including revenue and cost synergies, the merger also brings both short-term and long-term risks," analyst Michael Derchin wrote in a note.

The airline should find new avenues of growth and product offerings by linking its leading position in the Pacific Northwest with Virgin's strong franchise in California.

But, Derchin says the stock would "tread water" during the merger integration process. The combined company also faces increased competition on the West Coast and transcontinental routes, and fleet rationalization.

That said, the analyst feels Alaska would successfully integrate Virgin as "ALK has the customer loyalty, service, and financial strength, including an investment grade balance sheet and strong free cash flow, and management execution abilities."

On the shareholder returns front, Alaska Air expects to maintain its annual dividend (currently yielding 1.7 percent) while temporarily slowing share repurchases. However, Alaska Air expects shareholder returns to reaccelerate once integration is completed in 2018.