ALGT - Allegiant Travel Company: Buy To Own A Hotel And Airline

2023-05-04 11:15:42 ET

Summary

• Allegiant Travel Company blasted past analyst estimates.
• Stock offers an opportunity to own a resort and airline with one investment.
• While the airline is thriving, the hotel for now remains a risk but one that can be capitalized on.

Allegiant Travel Company ( ALGT ) stock surged nearly 12% after beating analyst estimates for the first quarter. It's an interesting move for the stock that I have a buy rating on, especially since it got downgraded by a Wall Street analyst just prior to posting blowout results. Perhaps the lesson here is that when Wall Street analysts downgrade, it is an interesting moment to consider buying.

In this report, I will analyze the first quarter results as well as the guidance and provide a valuation for Allegiant Travel Company.

Allegiant Travel Company Shows Model Airline Results

We can do a very long analysis of the results, but the margin of 15% during the quarter says it all. That's model airline margin right there. Revenues were up nearly 30% to almost $650 million, exceeding analyst estimates by $21.8 million, and EPS of $3.04 per share beat estimates by $0.79. Fuel costs per gallon were up 11.4% resulting in 14.1% higher fuel cost per available seat-mile. Capacity was up modestly by 1.2% while unit revenue was up 10%. Despite the unit costs excluding fuel increasing 10%, the airline operating margin climbed by 13 percentage points. Just like with other airlines, Q1 is the quarter with the relatively easy comp and the comp will be more challenging in the remainder of the year, but the big benefit for Allegiant is that, by the end of 2021, it was already operating capacity levels above 2019 levels, and it expanded that further in 2022 to 15% above pandemic levels. That is a stark contrast with other airlines, which are on track to have capacity recovery and expansion this year. In some way, Allegiant took the risk of growing beyond pre-pandemic levels early on, which now in a constrained market gives them some advantages. The capacity expansion needed to reduce CASM, Allegiant had it already in its system.

While earnings were strong, the updated guidance might have been why shares really took off. Capacity was projected to be 2 to 6 percent higher, but that has been brought down to flat to 3% up year-over-year. Nevertheless, the airline EPS went up to the $9 to $13 range, which is up $4 per share on lower fuel costs per gallon. Even when reducing Sunseeker losses, this would imply a $2.75 per share higher guidance as a loss per share for the Sunseeker Resort was previously not available.

Is Allegiant Travel Company Stock A Buy?

I marked the stock a buy in September 2022 and since then the stock gained 12.7%, outperforming the 4.9% return of the broader markets. The big question now is whether upside remains. Running the numbers through the model we have in development for readers of The Aerospace Forum, I do think that is this case. Wall Street analysts see 8% downside for the stock, but after running the numbers, I do see at least 40%-45% upside, bringing price target to $153-158.

The Risk For Allegiant Travel Company: Sunseeker Resort

While I am significantly more optimistic on the prospects for ALGT stock and I haven't been wrong in that assessment so far, there are risks. There are the obvious airline risks including fuel, labor and airport and airspace capacity and potential recession-induced demand pressures. The biggest risk to Allegiant is unique to the company and that is its Sunseeker resort. The opening for the resort is now scheduled for October 2023 whereas earlier indications pointed at May this year. Overall, while this could be a moneymaker over the longer term, it is a cash drain at present. There is $345 million that Allegiant has funded or still expects to fund. Sunseeker's remaining CapEx is $124 million, of which $118 million is already in Sunseeker's deposit account, meaning that there is no major liquidity usage expected to complete the construction. Though, obviously if more delays occur that could change.

In Q1 2023, Sunseeker operating expenses were below the expected $5 million, and around $5 million is expected for Q2 and another $15 million in Q3 for pre-opening expenses.

Conclusion: Stock With Upside And An Obvious Risk

The Q1 results were formidable I would say, and the guidance update was unequivocally bullish. I continue to see upside for the stock, despite Wall Street analysts being less optimistic. The obvious risk is the Sunseeker Resort which will continue to cost money this year even when construction is complete later this year and the opening happens as planned or at least that is what the guidance suggests. Allegiant provides now ramp-up for the hotel profitability if it manages to open by Q4, leaving room for the opening to slip and leaving some uncertainty regarding profit ramp-up on the table. I like the vertical integration here, but I also can understand the risk the market is seeing.

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