Why Allegiant Travel Company Sees Skies Free of Turbulence Ahead

How is hybrid travel business Allegiant Travel (NASDAQ: ALGT  ) faring in today's competitive landscape? In a word: great. The discount airline portion of the business can easily feel the pinch of increased expenses, but luckily it has a travel-booking segment to lend some relief to margins. The stock has booked a two-year gain of roughly 100%, yet its run may still have legs. In its fiscal first quarter, the company reported healthy jumps in unit-level metrics and, even as the No. 2 low-cost carrier in the U.S., maintains one of the chunkiest operating profit margins in the business. The stock isn't the cheapest in the game, but investors still have plenty of reasons to get on board Allegiant.

Flying high
With the wind at its back, Allegiant is finding success on all levels of its business. The company has been firmly in the black for 45 consecutive quarters. In the first quarter, revenue climbed more than 10% to $302.5 million on the back of an all-time high in average fare and a 1.6% gain in PRASM, which is passenger revenue per available seat mile. Ancillary revenue, which includes the travel booking website, grew 4.1%.

Margins remain a strong point for the company, even though Allegiant saw continued cost bumps from maintenance and training during the first quarter. As reported last quarter, Allegiant's fleet is relatively old, and many of its MD-80s will be in service throughout this year. The company is also, wisely, upgrading other parts of its fleet to generate higher PRASM. In the first quarter, Allegiant brought into service two Airbus A320s, in addition to two more MD-80s reconfigured with 166 seats.

An 8.8% drop in fuel expense per available seat mile helped to keep the company's operating margin around 19% for the quarter.

Everything about the business is growing: 12 new routes were added this past quarter, while car rentals from the website grew by double-digit gains. The company has nearly 13% more full-time employees than it did one year ago. Growth often comes at the expense of margins, and Allegiant is certainly paying its dues to scale up its business, yet the margins remain intact and healthy. The bottom line came in at $1.86 per share -- almost a 13% gain over the prior year's $1.65 per share.

Will it stay up?
Allegiant is in the midst of substantial growth, but the company doesn't quite fit the profile of an asset-laden grower. For one thing, its balance sheet looks phenomenal with more than $300 million in cash and just $149 million in debt. This isn't a legacy carrier by any stretch of the imagination. Second-quarter PRASM is expected to rise 2%-4%, while full-year 2014 capacity could grow as much as 13%. How does this translate to sales and earnings growth? Analysts expect an average of $5.86 per share for this year (a 21.5% jump over 2013's earnings), and an additional 18% gain for the fiscal full year 2016 to $6.92 per share. Whether the company hits or exceeds these estimates can largely depend on factors beyond the company's control -- weather, fuel costs, etc. Investors are best off monitoring the unit level growth measures, as mentioned above. 

The travel and services booking business complements the airline nicely, as deal-seeking customers are eager to bundle and save money. Allegiant understands its customer -- a small-town, value-focused individual looking to get where he or she is going as efficiently as possible. While the leader of ultra-low-cost airlines, Spirit, is also the worst-reviewed airline in the industry, Allegiant has maintained its reputation beyond low prices. Allegiant has a three-star rating, according to airline ratings website Skytrax while Spirit comes in at two stars.

At roughly 16 times earnings, this certainly isn't the cheapest pick in the airline bunch. Delta, which has also found success recently, trades at just 10.7 times earnings. Investors should note, though, that these really are different businesses. Investors are paying up for Allegiant's projected growth, and with the way it looks now, that premium may be worth it.

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