Allegiant Travel Company Stock: Q3 Shows Strong Business Model (NASDAQ:ALGT)

Happy family in masks traveling together

Yaroslav Astakhov

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

The Company operates low-cost passenger airlines, primarily serving leisure travelers in underserved cities, on approximately 593 routes between 98 origin cities and 33 holiday destinations. At the same time, the company last year restarted construction of the Sunseeker Resort, which is funded by $350 million in 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 significant upside potential.

Historical achievement

revenue

revenue (macro trends)

Over the past decade, the company’s revenue has grown steadily with no notable decline except in 2020. Such a significant improvement shows that the company has been able to steadily grow its business and has an essentially strong business model.

Along with revenue growth, profitability has also steadily increased over the same period, reaching its all-time high of $232 million in 2019, but in 2020 the company suffered losses due to the closure of its Covid-19-related operations.

Note that significant losses in the airline industry have been mitigated over the past two years by a government payroll program in which the government has supported many airlines by providing substantial funds to cover airline operating costs. As a result, the company was able to post a profit last year. In recent quarters, however, the amount of the subsidy has been stopped, which has led to a significant increase in expenditure.

Over the period, management has played it safe by keeping debt at moderate levels, but recently, due to higher investments and the resort’s reconstruction, debt has increased and has reached $1840 million; Also note that the company has over $1.1 billion in working capital, giving the company significant financial stability.

Over time, the management mindset has also evolved and management has begun to focus on ancillary revenue, which is why ancillary revenue has increased significantly from $5.87 per passenger to $64.73 per passenger from 2004 to 2021.

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

strength in the business model

Allegiant operates a unique business model where it focuses specifically on recreational customers, resulting in significant cost savings compared to companies that serve a variety of customers.

While most airlines focus on a broad customer base, high base fares, and low ancillary revenue, Allegiant does the opposite, focusing primarily on the leisure market, low base fares, and a high ancillary revenue model. The company strives for much of its profitability by offering various flight products, which helps the company increase its profitability while keeping airfares low.

Low base fares also help attract customers on a tight budget and provide a significant competitive advantage in underserved cities where customers are primarily focused on the price of the airline ticket.

The company actively manages seating capacity according to demand patterns and over time its ability to quickly manage capacity has helped the company maintain its profitability even under dynamic travel conditions as the company increases occupancy in this way as demand increases Business could mitigate the impact of increased fuel costs by reducing overall capacity when demand is not high enough to make operations profitable. Such a unique operating strategy helps the company make most of the flight profitable while other airline players suffer huge losses when demand falls.

Over the period, the Company’s ability to focus on ancillary revenue and its ability to manage its capacity has proven extremely profitable in an industry historically characterized by significant losses and consolidation.

risk factors

maturity of the debt

maturity of the debt (annual report)

Currently, the airline industry is facing significant disadvantages due to lower fares, higher fuel costs and pilot shortages. As a result, a large number of airlines have had significant problems refinancing their debt.

Also, investors have become wary of airlines and it has become very difficult to obtain refinancing under such conditions. In Allegiant’s case, significant debt is maturing over the next two to three years, putting the company at significant risk. But the business model is very strong and has made the company a lot of money.

cost structure

cost structure (quarterly report)

The next big risk is pilot shortages – due to the pandemic, many pilots have taken early retirement, resulting in a significant shortage of pilots. But in Allegiant’s case, management appears to have managed the pilot shortage significantly, as payroll costs have not increased significantly compared to its peers.

Although the company has a business model that manages capacity and mitigates the impact of fuel cost increases, the company has recently suffered huge losses due to significantly increased fuel prices. If prices stay high for longer, the company will suffer huge losses and in such a state, it becomes very difficult to refinance debt, which can lead to a sharp fall in the share price.

Why am I bullish on the stock?

quarterly result

quarterly result (quarterly report)

The company has suffered losses due to a significant increase in fuel costs, but the overall business model is very strong and has generated tremendous cash flows. Although there are various risk factors, the company has a strong financial position and a robust business model that allows it to manage risk.

Unfavorable economic conditions and negative sentiment in the airline industry have seen the stock fall more than 68% from its all-time high despite a strong history of profitability. The company currently trades at about $1.4 billion, while in the pre-Covid era it has made about $232 million in profit. It appears the company was trading at just 6 times its pre-Covid earnings.

The share is significantly undervalued and offers enormous upside potential. I believe Allegiant is a buy.

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