Allegiant Travel Company Stock: Third Quarter Reveals Strong Business Model (NASDAQ:ALGT)

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Yaroslav Astakhov

Alleging (NASDAQ:ALGT) is a leisure travel company focused on providing travel and leisure services to residents of underserved cities in the United States. Having a diverse revenue stream across various travel services and product offerings sets Allegiant apart from other travel companies.

The company operates low-cost airlines, primarily for leisure travelers in underserved cities, on approximately 593 routes between 98 cities of origin and 33 leisure destinations. Along with this, last year the company resumed construction of Sunseeker Resort, which is funded by $350 million debt and is expected to open in early 2023.

Due to the various setbacks the airline industry has faced, the stock has fallen significantly despite a robust business model and strong financial position, and from such an undervalued price, the stock offers a significant upside potential.

Historical performance

Revenue

Revenue (Macrotrends)

Over the past ten years, the company’s turnover has increased steadily, without a considerable drop except in 2020. Such a significant improvement shows that the company could develop its business consistently and has a considerably strong business model.

Along with the revenue growth, during the same period, profitability also increased steadily and reached its record high of $232 million in 2019, but in 2020 the company had to incur a loss due to the cessation of its operations related to covid-19.

Note that major losses in the airline industry over the past two years have been mitigated through a government payroll program, where the government has supported many airlines with significant funds to cover operating expenses airlines. Therefore, the company might show a profit in the last year. But in recent quarters, the amount of the grant has come to a halt, leading to a significant increase in expenses.

During the period, management played it safe by keeping debt levels at moderate levels, but recently, due to rising CAPEX and the rebuilding of the station, debt levels increased to $1,840 million; it should also be noted that the company has more than $1.1 billion in current assets, which gives it significant financial stability.

In addition, over time, management’s thinking evolved and management started to focus on ancillary revenue, which is why, from 2004 to 2021, ancillary item revenue increased significantly from 5.87 $ per passenger to $64.73 per passenger.

Recently, the company launched a new initiative called Allegiant 2.0, which focuses on expanding the home network, strengthening the business model and providing affordable air travel. This initiative will bring substantial growth to the company.

The strength of the business model

Allegiant operates a unique business model, where it focuses specifically on leisure customers, resulting in significant cost savings compared to those serving a wide variety of customers.

While most airlines focus on a wide variety of customers, high base fare and low ancillary revenue, Allegiant does the opposite as it focuses primarily on the leisure market, low base fare and model high ancillary income. The company pursues the majority of its profitability by offering various air-related products, which helps the company increase its profitability while keeping airfares low.

Additionally, having low base fares helps attract budget customers and provides a significant competitive advantage in underserved cities where customers are primarily focused on airfare.

The company actively manages seat capacity based on demand patterns, and during the period its ability to manage capacity quickly helped the company maintain profitability even in dynamic travel conditions, as as demand increases, the business increases utilization in such a way the business could mitigate the effect of rising fuel costs by reducing overall capacity if demand is not high enough to make operations profitable. Having such a unique operating strategy helps the company make most of the flight profitable, while other airline players have to suffer huge losses if demand drops.

During the period, the company’s ability to focus on ancillary revenue and its ability to manage capacity has proven extremely profitable in an industry that has a history of significant losses and consolidation.

Risk factors

debt maturity

debt maturity (Annual Report)

Currently, the airline industry is facing significant downsides due to lower fares, higher fuel costs and scarcity of pilots. As a result, a large number of airlines encountered significant difficulties in obtaining the refinancing of their debt.

Also, investors have become wary of airlines, and under these conditions, obtaining refinancing has become very difficult. In the case of Allegiant, significant debt will come due within the next two to three years, which exposes the company to significant risk. But the business model is considerably strong and has generated huge cash for the company.

expenditure structure

expenditure structure (quarterly report)

The next major risk is Shortage of pilots – due to the pandemic, a large number of pilots took early retirement, leading to a significant shortage of pilots. But in the case of Allegiant, it appears that management has managed the shortage of pilots significantly as the salary cost has not seen a significant increase compared to its peers.

Although the company has a business model that manages capacity and mitigates the effect of rising fuel costs, the company has recently suffered huge losses due to significantly rising fuel prices. If the prices remain high for longer, the company will have to suffer huge losses and under such conditions it will become very difficult to obtain debt refinancing, which could lead to a sharp drop in the share price. .

Why am I bullish on the stock?

quarterly result

quarterly result (quarterly report)

Due to a substantial increase in fuel costs, the company suffered losses, but the overall business model is considerably strong and has generated huge cash flow. Although there are various risk factors, the company has a strong financial position and a robust business model through which it can manage risk.

Additionally, due to unfavorable economic conditions and negative sentiment towards the airline industry, the stock fell more than 68% from its all-time high, despite a solid track record of profitability. The company is currently trading for around $1.4 billion, while it made a profit of around $232 million in the pre-covid period. It looks like the company is only trading for 6 times its pre-covid earnings.

The stock has become significantly undervalued and offers huge upside potential. I believe Allegiant is a buy.

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