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Here's Why Allegiant Travel Company Climbed 29.7% in January

By Lou Whiteman – Updated Apr 23, 2019 at 10:51AM

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The discount airline had a strong fourth quarter and forecast growth in 2019.

What happened

Shares of Allegiant Travel Co. (ALGT 4.53%) gained 29.7% in January, according to data provided by S&P Global Market Intelligence, thanks to a strong fourth-quarter performance and even better 2019 outlook. It was a nice reversal for the company compared to the share performance in 2018, but the stock is still down nearly 15% over the past year.

So what

Allegiant delivered fourth-quarter earnings of $2.56 per share, well ahead of the $2.47 consensus, on revenue that was up 8.7% to $412 million. Unit revenue increased by 4.4% in the quarter, while nonfuel costs were down 10%.

The airline's performance was helped by the retirement of its older-generation MD-80 aircrafts, which have been replaced by newer, more efficient Airbus jets. The company beat estimates despite increasing its marketing expense by almost 20% year over year.

Allegiant is forecasting earnings growth in the range of 30% in 2019, expecting earnings in the range of $13.25 to $14.75 per share compared to Wall Street's $12.85 consensus. The airline expects nonfuel costs to decline by at least 1.5% in the year, thanks to the newer jets, improved employee productivity, and better asset utilization.

Check out the latest Allegiant earnings call transcript.

Now what

Allegiant's airline is flying high, but investors need to be aware of diversification efforts that will take time to pay off. The company is also developing a 20-acre waterfront resort on the west coast of Florida that it expects will have more than 500 hotel rooms, as well as condo units and amenities.

The resort, which is expected to open by late 2020, is located near Allegiant-served Punta Gorda Airport just north of Fort Myers. Allegiant expects to spend upwards of $300 million in capital expenditures on the project in 2019, with returns on that investment unlikely to materialize before 2021.

Rendering of an aerial view of the Sunseeker Resort in southwest Florida

Allegiant's planned Sunseeker Resort in southwest Florida. Image source: Sunseeker Resorts.

Allegiant management is betting that by expanding into resorts, and making separate investments in golf and in starting a chain of family-friendly restaurants, the company can capture a higher percentage of total vacation spend.

The strategy, though unconventional for an airline, might prove to be the right one. But in the near term it's a potential management distraction and capex hog, and risks getting in the way of what should be one of the airline industry's most compelling growth stories.

Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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