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Bear of the Day: Alaska Air (ALK)

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Alaska Air Group (ALK - Free Report) was spotted by the Zacks Rank for its weak earnings momentum in mid-October, right before an earnings miss on 10/25 that took the stock down 17% in the following two days.

Alaska Air Group is the holding company of Alaska Airlines, which, together with its partner regional airlines, serves more than 100 cities through North America. The company is headquartered in Seattle, Washington.

ALK reported earnings of $2.24 per share in the third quarter (excluding 10 cents from non-recurring items). This result fell short of the Zacks Consensus Estimate of $2.25, while surpassing the year ago quarter by 1.8%.

Revenues came in at $2,120 million, lagging the Zacks Consensus Estimate of $2,166.2 million. The top line however grew 35.4% on a year-over-year basis.

The carrier reported a 4.2% decline in passenger unit revenues for the third quarter. In better news, ALK, which acquired Virgin America in December last year, announced a 9% increase in quarterly dividend to 30 cents per share.

The Earnings Decline

The Zacks Rank tracks earnings estimate revisions (EER) over a 60-day rolling window. And there were significant downward revisions in the past seven weeks since that earnings report to keep ALK in the cellar of the Rank.

But to give you an idea of the negative trend that the Zacks Rank spotted back in mid-October, here is the decline in "EER" over the past 90 days, going back to before that earnings report when analysts knew things were getting rough...

2017 Full Year Consensus: Down from $7.56 to $6.73

2018 Full Year Consensus: Down from $8.05 to $6.39

What did analysts see before the Oct 25 company report?

My colleague Ryan McQueeney had a few clues. Here's an excerpt from his report published on the morning of October 19...

There doesn't seem to be much positive momentum in the airline industry, and as mentioned, several hurricanes have devastated a handful of the biggest players. In fact, our “Transportation – Airline” group currently sits in the Bottom 6% of the Zacks Industry Rank. But what’s really interesting here is that Alaska Air is dealing with its own problems.
For one, a contractual dispute has led to a significant pay increase for pilots at the company’s Horizon Air subsidiary. Moreover, fuel cost per gallon in the third quarter is expected to come in nearly 12% higher than the year-ago period.
Alaska Air also recently released mixed September traffic results. The company’s total revenue passenger miles (RPMs) were up by nearly 8.4%, while its consolidated capacity gained 10.1%. What’s problematic is that load factor, or percentage of seats filled by passengers, fell nearly 1.5 percentage points year-over-year, underscoring the fact that capacity expansion has outpaced traffic growth.

(end of McQueeney excerpt)

This is the power of the Zacks Rank quantitative system. By aggregating all of Wall Street's analyst models, we can spot when their collective intelligence sees headwinds to a company's earnings.

In this case, the Rank alerted investors before what became a 21.5% drop from $79 on Oct 25 to $62 on Nov 14.

And now that shares have rallied back to $73, it's noting that little has changed in the downward trend.

Bottom line: It may still be time to stand aside this boarding gate for now until the earnings estimates stop going down, and start going back up. The Zacks Rank will let you know.

Zacks Editor-in-Chief Goes ""All In"" on This Stock

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