Allegiant Travel Company Shares: Q3 Reveals Strong Business Model (NASDAQ:ALGT) | Tech US News

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Happy family in masks enjoying traveling together

Yaroslav Astakhov

loyal (NASDAQ: ALGT) is a leisure travel company that focuses on providing travel and leisure services to residents of underserved cities in the US. Having a diversified revenue stream across multiple travel services and product offerings sets Allegiant apart from other travel companies

The company operates low-cost passenger airlines, primarily for leisure travelers in underserved cities via some 593 routes between 98 home cities and 33 leisure destinations. Along with that, in the past year, the company has restarted construction on the Sunseeker Resort, which is being financed by $350 million in debt and is expected to open in early 2023.

Due to the various setbacks the airline industry has faced, the stock has fallen significantly despite a robust business model and solid financial position, and from such an undervalued price, the stock offers significant upside potential.

Historical performance

income

income (Macrotrends)

Over the last ten-year period, the company’s revenue has grown consistently, with no significant drop except during 2020. Such a significant improvement shows that the company could grow its business consistently and has a substantially strong business model .

Along with revenue growth, during the same period, profitability also increased consistently and reached its all-time high of $232 million in 2019, but during 2020, the company had to suffer losses due to the closure of its business related to covid-19 operations

Note that significant losses in the airline industry over the past two years have been mitigated through a government payroll program, where the government has supported many airlines by providing significant cash to cover airline operating expenses. Therefore, the company could make a profit in the last year. But in recent quarters, the amount of the subsidy has stopped, leading to a significant increase in expenses.

During the period, management played it safe by keeping debt levels at moderate levels, but recently due to increased CAPEX and resort reconstruction, debt levels increased to $1840 million; Also note that the company has more than $1.1 billion in current assets, which provides the business with significant financial stability.

Also, over time, management’s thinking evolved and management began to focus on ancillary revenue, so from 2004 to 2021, ancillary revenue increased significantly from $5.87 per passenger to $64.73 per passenger.

Recently, the company started a new initiative called Allegiant 2.0, which focuses on expanding the domestic network, strengthening the business model and offering affordable air travel. This initiative will bring substantial growth to the company.

Strength in the business model

Allegiant operates a unique business model, where it focuses specifically on leisure customers, resulting in significant cost savings compared to those serving a wide variety of customers.

While most airlines focus on a wide variety of customers, high base fare and low ancillary revenue, Allegiant does the opposite, focusing primarily on the leisure market, low base fare and high ancillary revenue model. The company earns most of its profitability by offering various air-related products, which helps the company increase its profitability while keeping airfares low.

In addition, having low base fares helps attract low-budget customers and provides a significant competitive advantage in underserved cities where customers are primarily focused on the price of the air ticket.

The company actively manages seat capacity according to demand patterns and over the period its ability to quickly manage capacity has helped the company maintain its profitability even in dynamic travel conditions as demand increases, the company increases utilization in such a way. the company could mitigate the effect of rising fuel costs by reducing total capacity if demand is not high enough to make operations profitable. Having such a unique operating strategy helps the company to make most of the flight profitable, while other airlines have to suffer huge losses if demand falls.

During the period, the company’s ability to focus on complementary revenues and its ability to manage its capacity proved to be extremely profitable in an industry that has a history of significant losses and consolidation.

Risk factors

maturity of the debt

maturity of the debt (annual report)

Currently, the airline industry faces significant challenges due to lower fares, higher fuel costs and pilot shortages. As a result, a large number of airlines face significant problems in obtaining debt refinancing.

In addition, investors have become wary of airlines and in such conditions, obtaining financing has become very difficult. In Allegiant’s case, significant debt is coming due in the next two to three years, putting the company at significant risk. But the business model is substantially strong and has produced huge cash for the business.

cost structure

cost structure (quarterly report)

The next big risk is the pilot shortage: Due to the pandemic, a large number of pilots have taken early retirement, leading to a significant pilot shortage. But in the case of Allegiant, it appears that management has been significantly managing the pilot shortage as the salary cost has not seen a significant increase compared to its peers.

Although the company has a business model that manages capacity and mitigates the effect of rising fuel cost, recently, the company has been incurring huge losses due to the significant increase in fuel prices. If the prices remain high for a longer time, the company will have to suffer huge losses and under such conditions it will be very difficult to get debt refinancing, which may lead to a sharp fall in the share price.

Why am I bullish on stocks?

quarterly result

quarterly result (quarterly report)

Due to a substantial increase in fuel costs, the company is making losses, but the overall business model is significantly strong and has produced huge cash flows. Although there are various risk factors, the company has a strong financial position and a robust business model through which it can manage the risk.

Additionally, due to adverse economic conditions and negative sentiment about the airline industry, the stock has fallen more than 68% from its all-time high, despite a strong track record of profitability. The company is currently trading at around $1.4 billion, while it made a profit of around $232 million in the pre-covid period. The company appears to be trading at just 6x its pre-covid earnings.

The stock is significantly undervalued and offers huge upside potential. I think Allegiant is a buy.

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