Allegiant Travel: Bucking the Trend

Apr.22.09 | About: Allegiant Travel (ALGT)

Allegiant Travel Company (NASDAQ:ALGT) is certainly a bright spot in the current recessionary market. Although the S&P dropped more than 4% on Monday, Allegiant actually saw its shares rise by nearly the same amount. With the stock less than a dollar from its 52 week high, a positive trend is certainly in place and the stock has been very helpful in the success of the ZachStocks Growth Model.

The rise in the stock price is largely a result of the earnings figures which were released over the weekend. The company saw its revenue come in at $142.1 million which was 6.7% higher than the first quarter last year. A small increase in business is pretty exceptional in today’s market but the revenue growth pales in comparison to a gain of 191.5% in earnings. The first quarter earnings came in at $1.37 per share which represents about 80% of the earnings the company saw during the entire YEAR in 2008!

The strength is largely due to a decrease in fuel costs. The company has decided to avoid hedging fuel prices which has certainly benefited it in the last several quarters as oil prices are sharply off the levels seen last summer. In the first quarter, the operating expense per passenger was $75.42, compared to $102.86 last year. When you consider the average revenue per passenger was $108, the savings make a big difference. In fact, Allegiant reported operating margins at an all time high of 31.3%.

Allegiant operates a very non-traditional airline which has allowed it to remain profitable despite competitors reporting significant weakness. For starters, the company concentrates on small regional cities not serviced by the major airlines. This allows Allegiant to avoid price wars. A focus on leisure travel may seem a bad strategy for today’s environment, but leisure flights have better margins than business flights right now and the company is able to make additional revenue by partnering with hotels and attractions to sell other services to customers. Allegiant is dedicated to being a low cost airline so it keeps expenses at a bare minimum. And, as we have already noted, it does not hedge fuel costs.

While Allegiant’s planes were busy during the quarter (carrying a load factor of more than 90%), management was also busy making some key strategic decisions. In the press release, management noted that one of the most important events of the quarter was the acquisition of the Information System assets from CMS. This will allow the company to cut back on quarterly expenses, and is a great example of management using cash on-hand to create a more healthy firm for the long-run.

The company also used $11.5 million for capital expenditures, including the purchase of 3 additional planes. Allegiant now has 41 aircraft in service compared to 36 last year. There are an additional five aircraft owned by the company which will soon be flying with the fleet. Right now, three of those planes are being leased to a third party - a creative way for the company to earn additional revenue on its assets.

Cash on hand increased to $236.4 million at the end of the quarter with only 59.3 million in total debt. This is after the company spent $7.1 million to buy more than 210,000 shares. The average paid was $33.59 which is a pretty attractive price. In fact, if you look at the chart you can see how this purchase program actually supported the stock in the low 30’s before it began the current run.

At this point the stock has rallied more than 70% from its March swing low. But ironically, the stock still looks quite attractive. With expectations of $4.36 per share this year and $4.51 next year, the stock is just 12.5 times earnings - quite a deal for a firm with the growth of Allegiant. And with new routes being added (including the new Los Angeles destination) these estimates could prove conservative. I think Allegiant will continue to provide investors with strong gains and I look forward to seeing the news at the end of the second quarter.

Allegiant Travel Company (<a href='' title='Allegiant Travel Company'>ALGT</a>)

ALGT Notes

Disclosure: Author has a long position in the ZachStocks Growth Model.