Today's Buy Opportunity: Allegiant Travel

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Known for its cutthroat competition and barely legal margins, the airline industry has a bad rap in the investing community. Like any other ultracompetitive market, though, there are opportunities for differentiated, low-cost providers to not just succeed, but fly. Southwest Airlines (NYSE: LUV  ) is a poster child of this phenomenon, with its stock price up an astounding 34 times over the past 30 years.

But that story's done and done. In December 2006, a new prince of the skies had an initial public offering at $18, and is now soaring at $43. That company is my "11 O'Clock Stock" pick: Allegiant Travel (Nasdaq: ALGT  ) .

Allegiant fast facts

Market Capitalization

$850 million

Industry

Airlines

Revenue (TTM)

$605.8 million

Earnings (TTM)

$64.5 million

Cash / Debt

$249.2 million / $39.4 million 

Key Competitors

Southwest Airlines, UAL (Nasdaq: UAUA  ) , Delta Air Lines (NYSE: DAL  ) , JetBlue (Nasdaq: JBLU  ) , US Airways (NYSE: LCC  )

Source: Capital IQ, a division of Standard & Poor's. TTM is trailing 12 months.

Allegiant: The best airline in the world
That's a bold statement for an airline that most people probably haven't even heard of, but for its category -- low-cost carriers -- that's exactly what trade publication Aviation Week found in its cross-industry study. So how did Allegiant do it? How did Allegiant find a way to differentiate itself from the rest of the pack, carve out a nice little niche, own that niche, and then earn industry-leading margins and returns on capital? It did it because nobody else competed with it.

Source: Company presentations.

Source: Company presentations.

See that map? That's not your typical airline's route map. Allegiant targets and focuses on leisure travelers, a completely underrepresented population with different needs and wants compared to the business travelers that most airlines target. For instance, say you've planned a vacation in Tampa Bay, Fla. -- you don't care that your flight leaves in the afternoon, and you don't care that you have to leave on a Wednesday. What you do care about is that you get to fly straight out of your local airport in Peoria, Ill., instead of driving three hours on the interstate to Chicago, and that you get a direct flight to two weeks of sand and beaches. And that it's going to cost you less than anything else you could get.

A wizard disguised as an airline
And there's the magic: Allegiant operates 143 routes but only faces direct competition on 10 of them. That means it's a monopoly operator on 93% of its flight routes. Less competition means less cost for Allegiant, which means lower prices and higher volumes. And yet, the company's revenue per available seat mile (an industry metric that measures how efficiently an airline utilizes its seat capacity) hasn't suffered. By "unbundling the traditional airline product" -- in other words, you, the customer, only pay for exactly the amenities you actively desire: checked bags, seat selection, priority boarding, and so on -- Allegiant is able to advertise a lower headline price while still being able to extract enough ancillary revenues to generate the highest revenue per available seat mile vs. cost per available seat mile spreads in the industry.

 Airline

RASM

CASM

Difference

Allegiant

10.24

8.00

+2.24

Southwest Airlines

10.56

10.29

+0.27

JetBlue 

10.09

9.24

+0.85

UAL

11.61

11.43

+0.18

Delta Air Lines

10.34

12.32

(1.98)

US Airways

12.29

12.08

+0.21

Source: Capital IQ, a division of Standard & Poor's. TTM is trailing 12 months.

And as one would expect, the RASM-CASM spread is reflected in outperformance on every other metric, too.

Company

Market Cap

(Millions)

3-Year Revenue Growth %

FCF %

ROIC %

Cash-to-Debt Ratio

EV/EBITDA

Allegiant Travel

$850

26.8

15.4

19.9

6.3

4.5

Southwest Airlines

$9,004

4.7

0.6

3.1

0.8

7.2

JetBlue

$1,870

10.4

(7.6)

3.5

0.3

7.8

UAL

$3,906

(2.3)

2.3

8.8

0.5

4.9

Delta Air Lines

$9,355

17.2

(1.0)

5.3

0.3

7.1

US Airways

$1,720

(1.4)

(4.8)

6.3

0.4

6.1

Source: Capital IQ, a division of Standard & Poor's. TTM is trailing 12 months. EMITDA is earnings before interest, taxes, depreciation, and amortization.

Bottom line and risks
It is important to note that Allegiant's fleet is old. The average age of its aircraft is 20, which in plane years is probably up there in the 60s or 70s. As the company continues to grow and find new routes appropriate for its strategy, it will hit a major capex cycle where it needs to upgrade, replace, and augment its fleet. I believe its ample cash flow and balance sheet will be enough to let it get through these growing pains smoothly, and I'm not alone -- management recently announced that it was doubling its stock repurchase authority.

Against this background, though, it's also clear that the company is growing faster, earning higher margins, delivering better returns on capital, sporting a better balance sheet, and trading at a lower multiple than all of its peers. If you missed the Southwest rocket, this might be a second chance to get some air.

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Motley Fool Rule Breakers analyst Sean Sun does not own shares in any of the companies mentioned. Southwest Airlines is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (29)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 05, 2010, at 11:19 AM, CPACAPitalist wrote:

    I fly Allegient from my local airport in Pasco, WA to Las Vegas. The planes are a little older, and the service is bare bones, but who cares when you are paying as low as $40 a ticket each way! I can fly to Vegas for a weekend of fun for less than it would cost me to drive 200 miles to Seattle. This is in part due to the cheap rooms in Vegas, but when it comes to leisure travel on the cheap, Allegient has a good thing going. And they recently added service to LA from my airport!

  • Report this Comment On August 05, 2010, at 11:55 AM, flying70 wrote:

    Allegiant is an airliner? An airliner as in one plane? Can an airline buy an Allegiant airliner? Maybe order an Alegiant 525? Southwest's stock rose only 34 times in 30 years? Did it stay the same or go down in all the other 30 years of trading days? How does that route map not look like any other "airliner" [sic]? Good subject for an article, but when you are asking people to take your advice, you ought to sound qualified enough to give it.

  • Report this Comment On August 05, 2010, at 1:22 PM, Melaschasm wrote:

    With a P/E above 13, Allegiant is not 'cheap'.

    However, they have low debt, and both their ROI and ROE are above 20%.

    This looks like a good company in a generally bad industry. I am not sure how far they can expand the current business model, but there does appear to be many popular destinations that can still be added.

    This might be a good opportunity to buy stock in a company, then hedge that investment with a long term put on the industry. Such a hedge would protect against anything that hurts the entire industry, such as soaring fuel costs/taxes or another terrorist attack.

  • Report this Comment On August 05, 2010, at 1:35 PM, catoismymotor wrote:

    My money does not go into companies or industries where the word *tinuous* can be applied to just about every aspect.

  • Report this Comment On August 05, 2010, at 2:14 PM, CPACAPitalist wrote:

    @flying70: do you read articles to find (perceived) grammer errors, or for the subject of the actual article? Lol, you got to relax man.

  • Report this Comment On August 05, 2010, at 2:38 PM, TMFKris wrote:

    Thank you, flying70, for pointing out our "airliner" slip. It's been corrected.

    Kris -- TMF copyeditor

  • Report this Comment On August 06, 2010, at 12:18 PM, kesehc wrote:

    "Fool" certainly is apropos with this pick.

    Outsourcing all your core employees or paying them peanut wages in the airline industry is a recipe for disaster. Profit at any cost isn't worth the cost in this business. Think: Lowest Common Denominator (i.e. Colgan Air crash in NY) for maintenance, let alone flight attendants and pilots. Is this what you would feel good, let alone safe, placing your family and loved ones on?

    The last airline that used decrepit airliners to save money was Valujet and their fleet of used DC-9s bought from Turkey. Anyone still picking Valujet stock to win?

    The industry trade groups tout the old double speak that they meet or exceed safety standards. If you think the FAA or government regulators will keep you safe, all I have to say to you is the SEC does a better job policing Wall Street.

    When you buy this stock, you support the Goldman-Sachs-like mentality that got us into our current recession. It's one thing when your 401k loses some value, but if your family is on an airplane that is lost due to poor oversight, fatigued pilots, or shoddy maintenance, you might think differently.

    SWA and DAL are dead? In this business, give me compay that treat their people with a modicum of decency anyday. SWA has been around for 30+ years, and DAL 80+...both with many military veterans among their ranks.

    This is not an attack on the people of Allegiant, but the corporate practices and an industry that value a quick buck over anything else.

    Who wins? Who loses? I guess whoever you choose to feed.

  • Report this Comment On August 06, 2010, at 10:46 PM, only1ferret wrote:

    I was also reminded of valujet while reading this.

  • Report this Comment On August 13, 2010, at 4:08 PM, mikw36 wrote:

    I fly allegiant often and I feel more comfortable with them than southwest or american. It is nice not to have to go to a big city or big airport to catch a flight. I think their business model is outstanding. direct flights out of small airport that you don't have to drive 3 hrs to get too, nice. Oh and they are inexpensive.

  • Report this Comment On August 29, 2010, at 5:11 PM, thidmark wrote:

    The Valujet incident had nothing to do with "decrepit" planes.

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