How High Can This Airline Stock Fly?

I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series. We'll be taking a closer look at many of the market's great growth stocks to see which of them show real, numerically relevant signs of sustainability.

Next up is Allegiant Travel (Nasdaq: ALGT), an "11 O'Clock Stock" pick made by my Rule Breakers teammate Sean Sun. His thesis is simple: Allegiant faces virtually zero competition in the markets it serves.

Whereas Southwest (NYSE: LUV) and JetBlue (Nasdaq: JBLU) fight over business customers in major U.S. business routes -- think L.A., New York, Chicago, D.C., etc. -- Allegiant serves pleasure travelers in less-accessible areas.

Foolish facts

Data current as of Sept. 18.

Fools have become more bullish since Sean's pick, but there remain plenty who've been bearish for years yet refuse to close out their losing picks. Top stock picker goldminingXpert wrote in August 2008 that Allegiant was "pricey for an airline" and maintains an underperform ratings in CAPS to this day.

Maybe Allegiant was expensive two years ago, but I don't see that now. This is a profitable carrier trading for 10.4 times next year's average earnings estimate -- roughly in the same range as low-cost peers Southwest and JetBlue, which trade for 12.2 and 9.3 times 2011 estimates. The difference? Allegiant is growing faster and more efficiently. Management is also repurchasing shares.

The elements of growth

Source: Capital IQ, a division of Standard & Poor's.

There's mostly good news in this table. Let's review:

• First, the past 12 months seem like anomaly compared to earlier trends. Normalized net income was growing massively -- and faster than receivables -- just as margins were rising. All three metrics have since reversed themselves.
• Yet, I don't see this as a big issue, if only because return on capital remains above 20%. There are software companies that have a hard time achieving ROC that good.
• And it's because of management's record with allocating capital that I'm confident a stock repurchase will create value for shareholders.

Competitor and peer checkup

Source: Capital IQ, a division of Standard & Poor's, current as of Sept. 18.

This table may be somewhat misleading. Alaska Air and JetBlue have seen inconsistent revenue growth, and Delta reorganized itself in bankruptcy before merging with Northwest Airlines.

Allegiant, by contrast, is simply an efficient carrier. But don't take my word for it. Go back to the numbers in Sean's write-up. Allegiant benefits from a generous spread between its revenue and cost per seat mile, and an equally bountiful load factor. The "load" is the percentage of traffic a carrier hauls versus its available capacity. In August, Allegiant's planes flew at 89% of total capacity.

Grade: Sustainable
Aging industries are often ripe for disruption, and Allegiant has many of the aspects of a classic Rule Breaker. There's little competition for this top dog and first mover, which is growing fast in a large, important industry (e.g. cheap leisure travel). It's also efficient, and blessed with engaged managers. CEO Maurice Gallagher Jr. still owns more than 20% of the company. I'll be joining him by opening a small position when Foolish disclosure rules permit.

Now it's your turn to weigh in. Do you like Allegiant Travel at these levels? Would you add it to your Foolish watchlist? Join the discussion in the comments box below, and when you're done, click here to get today's 11 O'Clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email or replying to him on Twitter.