Alaska Air Group, Inc. (NYSE:ALK) is currently in talks with the U.S. Justice Department to see if it can reach a deal for approval to buy Virgin America Inc.

On April 4, 2016, the company announced plans to acquire Virgin America. If approved by regulators, the merger with Virgin America is expected to provide the company with broader national reach and position them as the go-to airline for people living anywhere along the West Coast.

The combined airline would provide 1,200 daily departures to its customers, leveraging its strength in the Pacific Northwest with Virgin America’s strength in California. It would also provide Alaska Air with additional access to hard-to-come-by landing slots and constrained gates at destinations such as New York (JFK), San Francisco, and Los Angeles.

Alaska Air stated in its latest 10Q, “We believe that combining our loyalty programs and networks will provide greater benefits for our West Coast customers and will expand our international partner portfolio giving our customers an even more expansive global reach. The larger platform for growth, and the synergies the combined airline is expected to generate, will allow us to create greater value for our stakeholders.”

We have a number of airlines in our Large Cap 1000 Screen at the moment, but Alaska Air is the clear standout.

Recent Trend

Alaska Air has been interesting to watch over the past six months with its share price dropping to $55.66 on June 27 earlier this year from a high of $82.24 on April 18. The current share price sits around $72.11.

(Source: Google Finance)

Strong Revenues & Increasing Net Profits

A quick look at the company’s latest income statement (below) shows that total operating revenues have increased slightly from $2.7 Billion for the six months ending June 2015 to $2.8 Billion for the six months ending June 2016. Net Income has increased by 15.9% from $383 Million for the six months ending June 2015 to $444 Million for the six months ending June 2016. The main saving has been the 25% reduction in the cost of fuel from $496 Million to $368 Million.

(Source: Company Reports)

Strong Balance Sheet

A quick look at the company’s balance sheet (below) shows that Alaska Air has $1.6 Billion in cash and cash equivalents and marketable securities at June 30, 2016.

While at the same time its liabilities include $117 Million of short term debt and $509 Million in long term debt.

When we deduct the total debt ($626 Million) from the $1.6 Billion in cash and cash equivalents and marketable securities, that leaves the company with an excess of approximately $980 Million.

Strong Free Cash Flow

A quick look at the company’s cash flow statement (below) shows $899 Million in Operating Cash Flow for the six months ending June 30, 2016. With Capex of just $340 Million that means Alaska Air had $559 Million in Free Cash Flow.

The company did not increase its debt or issue new shares indicating that the company’s investing activities are being paid for by the cash generated from its operations. In fact, such is the excess of free cash flow that the company paid back debt of $57 Million, spent $193 Million to repurchase its own common stock and paid dividends of $68 Million.

The company has managed to generate $982 Million in free cash flow for the trailing twelve months (TTM), giving it a Free Cash Flow/Enterprise Value Yield of 12%.

Valuation

Alaska Air currently has a market cap around $8.8 Billion. With cash and cash equivalents and marketable securities exceeding total debt by approximately $980 Million, the company has an Enterprise Value of approximately $7.9 Billion.

Trailing twelve month (TTM) operating earnings are $1.4 Billion so, the company has an Acquirer’s Multiple of 5.47 and is selling on a P/E ratio of just 10. Thanks to its current repurchase program Alaska Air has a buyback yield of 6% and a dividend yield of 1%, for a shareholder yield of 7%. Shareholder yield is defined as (buyback yield plus dividend yield).

As if that’s not enough, there could have been even better news for existing shareholder with the company stating in its latest 10Q, “Prior to the announcement of our pending acquisition of Virgin America, we had planned to return a greater amount to shareholders in 2016 through dividends and stock repurchases than we did in 2015. In the second quarter we paused our share repurchases in advance of the pending acquisition.”

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