Better Buy for 2022: American Airlines vs. Alaska Air

Fort Worth, Tex.-based American Airlines Group, Inc. (AAL) and Alaska Air Group, Inc. (ALK) in Seattle, Wash., are two popular airline operators in the United States. AAL provides scheduled air transportation services for passengers, cargo, and mail service through its hubs and partner gateways. In comparison, ALK provides passenger and cargo air transportation services, including airline and hotel reservations, conference travel, car hire, visa, online booking, cruises, airport, and risk management services.

With the continuing rapid spread of the COVID-19 omicron variant, related staffing shortages, and the imposition of travel restrictions, the airline industry has been witnessing flight cancellations since last month. However, experts expect the situation to improve in the near term considering the less harmful nature of the new coronavirus variant. Airline stocks had an excellent start to 2022 because experts predict the travel industry will witness a big rebound.

Airline carriers are trying to introduce new travel routes and provide enhanced customer experiences. And investor interest in this space is evidenced by the U.S. Global Jets ETF’s (JETS) 10.2% gains over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) 0.3% returns. The global Airlines market is expected to grow at a 2.9% CAGR to $730.30 billion by 2026. So, both ALK and AAL should benefit.

ALK stock is a winner with 11.3% price gains versus AAL’s 9.3% returns in terms of the past month’s performance. But which of these stocks is a better pick now? Let us find out.

AAL is one of the stocks currently in the POWR Charts trading alert service based upon Christian Tharp’s 5 WINNING Stock Chart Patterns)

Latest Developments

On Jan. 11, 2022, AAL and Aer Lingus, the flagship carrier of Ireland, announced a codeshare agreement that will help customers improve the connectivity between the U.S. and Ireland. Customers traveling with Aer Lingus will be able to book codeshare travel on AAL flights. AAL expects to witness high customer demand in the coming months.

On Dec. 13, 2021, ALK and its fellow oneworld member airlines– AAL, British Airways, Finnair, and Iberia–announced new nonstop international flights from West Coast hubs and other airports every week to London, Madrid, Barcelona, Stockholm, and Helsinki, starting this summer. Also, by offering a variety of privileges and benefits, ALK and its fellow oneworld member airlines are looking forward to witnessing high demand in the coming months.

Recent Financial Results

AAL’s total operating revenues for its fiscal 2021 third quarter, ended Sept. 30, 2021, increased 182.7% year-over-year to $8.97 billion. The company’s operating income was  $595 million, versus a $2.87 billion loss in the year-ago period. Its net income was $169 million for the quarter, versus a $2.40 billion loss per share in the prior-year quarter. And its EPS came in at $0.25, compared to a $0.25 loss per share in the year-ago period. The company had $293 million in cash as of September 30, 2021.

For its fiscal 2021 third quarter ended September 30, 2021, ALK’s total operating revenues increased 178.6% year-over-year to $1.95 billion. The company’s operating income came in at $258 million versus $571 million in the prior-year period. Its non-GAAP net income was $187 million, compared to a $399 million loss in the year-ago period. And its EPS came in at $1.47 versus a $3.23 loss per share in the prior-year period. The company had $495 million in cash and cash equivalents as of Sept. 30, 2021.

Past and Expected Financial Performance

AAL’s total assets have grown at a 9.2% CAGR over the past three years. AAL’s EPS is expected to remain negative in its fiscal year 2022, ending Dec.31, 2022. The company’s revenue is expected to increase 45.5% year-over-year in fiscal 2022.

In comparison, ALK’s total assets have increased at an 8.4% CAGR over the past three years. Analysts expect ALK’s EPS to increase 305.8% year-over-year in its fiscal year 2022, ending Dec. 31, 2022. Its revenue is expected to grow 39.6% year-over-year in fiscal 2022.

Valuation

In terms of non-GAAP P/E for the next fiscal year, ALK is currently trading at 12.66x, compared to AAL’s negative 53.17x. In terms of forward EV/Sales, ALK’s 1.29x compares with AAL’s 1.48x.

Profitability

AAL’s trailing-12-month revenue is almost 4.8 times ALK’s. However, ALK is more profitable, with a 6.2% gross profit margin versus AAL’s negative value.

Furthermore, ALK’s 2.8% levered free cash flow compares favorably with AAL’s negative value.

POWR Ratings

While ALK has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, AAL has an overall C grade, equating to a Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both ALK and AAL have C grades for Momentum, which is consistent with their mixed price performance over the past year.

In terms of Sentiment, ALK has been graded a B, which is consistent with favorable analysts’ estimates regarding its EPS growth. Analysts expect ALK’s EPS to improve 305.8% year-over-year to $4.26 in its fiscal year 2022. However, AAL’s D grade for Sentiment is in sync with analysts’ expectations that its EPS will remain negative in the same fiscal year.

Of the 31 stocks in the Airlines industry, ALK is ranked #2, while AAL is ranked #10.

Beyond what we have stated above, our POWR Ratings system has also rated ALK and AAL for Growth, Quality, Stability, and Value. Get all ALK ratings here. Also, click here to see the additional POWR Ratings for AAL.

The Winner

Despite rising concerns over the omicron variant, an expected rebound in travel demand should enable ALK and AAL to overcome the challenges and profit in the coming quarters. However, its relatively lower valuation and higher profitability we think make ALK a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Airlines industry.

AAL shares were trading at $18.55 per share on Tuesday morning, up $0.06 (+0.32%). Year-to-date, AAL has gained 3.29%, versus a -3.42% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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