What: Shares of Allegiant Travel (NASDAQ:ALGT), a low-cost airline company that focuses on underserved markets, flew higher by 13% in June, based on data from S&P Capital IQ, on the heels of three news events.
So what: Arguably the most exciting news in June for Allegiant was the release of its May traffic numbers. Although passenger revenue per available seat mile, or PRASM, fell an estimated 18.4% to 18.8% year-over-year (in-line with Allegiant's prior expectations), the total number of passengers increased by 14% year-over-year, and the company's third-quarter scheduled capacity increase in available seat miles should be an estimated 21% to 25%. In laymen's terms, Allegiant could be sacrificing a bit in its margin column for the time being, but its capacity should pay future dividends as its passenger count and capacity grow.
Secondly, about a week after releasing its traffic results for May, Allegiant announced that the Ninth Circuit United States Court of Appeals reversed a lower court decision requiring Allegiant to "maintain the status quo" when negotiating a contract with the pilots' representative. It's no secret that unionized pilots and airline companies have been butting heads for decades, but this ruling at least marginally puts the ball back in Allegiant's court and could mean a less steep incline in pilots' salaries over time.
Lastly, research firm Morgan Stanley initiated Allegiant stock with an "equal-weight" rating, but slapped a psychologically friendly $200 price target on its shares.
Now what: The $64,000 question that investors need to ask themselves here is whether or not Allegiant stock has the ability to fly even higher.
In my opinion, I believe Allegiant might be one of, if not the, best run airline at the moment, and would certainly suggest that additional upside may be warranted.
To begin with, Allegiant's business model is conducive to more flexibility and profitability than the major airlines are used to. Because it focuses on underserved markets, it typically is working with routes that have minimal competition. It can also shelve unprofitable routes with relative ease compared to major airlines where fliers count on specific routes, regardless of whether they're profitable to an airline or not.
Another advantage is Allegiant's bare bones pricing strategy. By dangling the carrot and attracting cost-conscious consumers Allegiant has a business model that can probably survive in any economic environment. Its optional fees are almost pure profit as well since they typically coerce fliers to use their home computers or airport kiosks to complete their transactions as opposed to Allegiant representatives (where most transactions cost more).
Allegiant also has a considerably older fleet than its peers, but that's because of its strategy to purchase older planes. They may lose a bit in terms of fuel efficiency, but it means less money out of pocket for Allegiant, and it makes expanding capacity easier, too. The recent swoon in jet fuel prices has been especially good news for Allegiant and its older, less fuel-efficient fleet.
Between 2014 and 2018, Allegiant's EPS is projected to nearly triple to $17 per share according to Wall Street's estimates. That type of growth is certainly suggestive of additional upside in Allegiant's stock.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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