Allegiant Travel: Highest-Profit Margin Airline At A Bargain Valuation

Summary

• Allegiant operates a unique airline model, which has allowed for the highest global profit margins and profitability, with less cyclicality.
• By growing routes with zero competition from under-served towns, Allegiant has compounded at 20% p.a. since its 2006 IPO.
• Today, the valuation is very low, as the market expects the founder to destroy capital indefinitely as Allegiant has ventured into the resort business.
• Given the valuation, I believe this is a high-uncertainty but low-risk situation. The founder is shrewd, and building one resort to expand the customer wallet is not a crazy idea given Allegiant's unique airline traits.

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The world’s most profitable airline available at a single-digit earnings multiple.

1. Key facts, figures and background

Price ($)	135	P/E '20	7.5 x
Ticker	ALGT	EV/EBITDA '20	5.2x
Market Cap (BUSD)	2.2	Dividend yield	2.1%
EV (BUSD)	3.2	Normalized ROE	20-30%
Daily liquidity (MUSD)	20	Net debt/EBITDA	1.6x

Click to enlarge

Allegiant Travel (NASDAQ:ALGT) operates one of the 3 US ultra-low cost carriers (ULCCs).

As opposed to its ULCC peers Frontier and Spirit (SAVE), the company has a unique “cockroach” business model which has been GAAP profitable each single quarter since 2004.

Maurice Gallagher (69) gained control of WestJet in bankruptcy court as a creditor in 2001 and built ALGT’s 100-jet fleet by focusing on low-frequency leisure routes with zero competition. Gallagher owns a stable 18% stake.

ALGT’s reported EV / EBIT multiple has compressed steadily since ’16, from the mid-teens to 7.6X today. On a P/E multiple basis, compression is even more dramatic due to 2018 tax cuts and the recent debt load. Since ALGT announced it is building a Florida resort 4 years ago (opening in June ‘21), the pure airline investor base and airline sell-side alike have shunned the stock. Despite this, ALGT has returned a total 10X - or 20.0% CAGR – for ’06 IPO investors: the result of profitably growing revenue double digits.

Figure 1: Data from Bloomberg. Allegiant has the world’s highest operating margin (and ROIC). Metrics were temporarily depressed during the complete fleet reshuffle in ’17 amd ’18 (next one in 2 decades)

Why has ALGT been consistently profitable?

• Unusually low fixed costs that go with its unique business model
• Gross profit margin is high

Analyst’s Disclosure:I am/we are long ALGT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This post cannot be construed as investment advice. Do your own due diligence.