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Why You Should Retain Alaska Air (ALK) Stock in Portfolio Now

Alaska Air Group ALK is benefiting from the buoyant air-travel-demand scenario and fleet-upgrade efforts. However, escalating fuel costs are worrisome.

Factors Favoring ALK

Continued recovery in air-travel demand bodes well for Alaska Air. On the back of upbeat air-travel demand and favorable pricing, Alaska Air reported better-than-expected earnings per share in fourth-quarter 2022.

Alaska Air expects to boost its fleet and workforce in 2023 to meet the anticipated high demand. ALK expects first-quarter 2023 total revenues to increase 29-32% from the first-quarter 2022 actuals. To match the upbeat demand, the capacity in the March-end quarter is expected to expand 11-14%.

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On a shareholder-friendly note, ALK’s management aims to resume share buybacks this year. The restrictions under the CARES Act prohibited airlines from paying dividends or buying back shares till Sep 30, 2022.

The buybacks will be made under the $1-billion repurchase plan cleared by the board of directors in August 2015. Notably, $456 million remained under the authorization. The buybacks are expected to be $75-$100 million in 2023.

A Key Risk

Escalating fuel costs pose a threat to ALK’s bottom line. Oil price is moving north primarily because of supply concerns due to Russia's invasion of Ukraine. In fourth-quarter 2022, average fuel price per gallon (including related taxes) climbed 57.1% year over year to $3.55.

Fuel cost per gallon in first-quarter 2023 is expected to be $3.35-$3.45. The mid-point of the guided range is much higher than the first-quarter 2022 actual of $2.62.

Due to high fuel costs, Alaska Air’s management trimmed its forecast for the first-quarter 2023 adjusted pre-tax margin. The metric is now expected to be -3 to -6% (earlier range: -1 to -4%).

Zacks Rank & Key Picks

Alaska Air currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the Zacks Transportation sector are Copa Holdings CPA and GATX Corporation GATX.

Copa Holdings currently sports a Zacks Rank #1. CPA's focus on its cargo segment is encouraging. In fourth-quarter 2022, cargo and mail revenues jumped 69% to $27.09 million, owing to higher cargo volumes and yields.

For first-quarter and 2023, CPA’s earnings are expected to register 302.9% and 40.6% growth, respectively, on a year-over-year basis.

GATX Corp carries a Zacks Rank #2 (Buy) at present. The gradual improvement in the North America railcar leasing market is a huge positive for GATX. Management expects recovery in the North America railcar leasing market to continue in 2023.

For 2023, GATX anticipates the railcar leasing environment in North America to remain favorable. GATX expects current-year earnings to be $6.50-$6.90 per share.  We are also impressed with GATX's measures to reward its shareholders through dividends and buybacks.

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Copa Holdings, S.A. (CPA) : Free Stock Analysis Report

Alaska Air Group, Inc. (ALK) : Free Stock Analysis Report

GATX Corporation (GATX) : Free Stock Analysis Report

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