Alaska Air Just Became A Top Pick At Morgan Stanley

Alaska Air Group, Inc. ALK shares experienced a sell-off in late October in conjunction with third quarter results. Based on an investor poll, Morgan Stanley found that sentiment remained mixed, although a majority are bullish.

The Analyst 

Morgan Stanley analyst Rajeev Lalwani has an Overweight rating and $78 price target for Alaska Air. The firm moved the stock to its top U.S. Airline pick.

The Thesis

Morgan Stanley said it is more bullish on Alaska Air shares, given they trade at below-average valuation multiples despite above-average margins and growth prospects. 

The investor survey revealed half of the respondents are favorably disposed toward the stock, given their view that the current valuation does not reflect relative fundamentals, analyst Lalwani said. (See Lalwani's track record here.) 

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About 36 percent are Neutral on the stock on the the basis of near-term revenue and cost trends that are "likely pressured" until the second half of 2018, Lalwani said.  

The remaining 14 percent of investors who were polled are more bearish on the stock "and noted current estimates remain too high given unit cost pressures from non-pilot labor groups and additional merger work," Lalwani said. 

Although some of Alaska Air's underperformance is "warranted" due to near-term trends, opportunity for the stock exists into 2018 and beyond, according to Morgan Stanley. 

Despite materially stronger prospects, Alaska Air shares are trading in-line with lower quality legacy airlines and below the historical premium of 2-3 turns, Lalwani said. The firm projects margins will be 200-600 basis points higher in 2018, with a healthy balance sheet and robust growth potential.

The Price Action

Alaska Air shares have shed 26.2 percent year-to-date, while the NYSE Arca Airline Index is down merely 3.75 percent in the same period.

At the time of writing, Alaska Air shares were up 1.78 percent at $65.59.

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Photo courtesy of Alaska Air.