ecam

SCA would offer us an international opportunity and an ETOPs certificate we don't have. I don't think a merger would be bad since most of our bases are sheltered. We aren't as vulnerable to seniority as other airlines are. And they only have ~350 pilots.

People over there are talking because Jude has made major changes in a short period of time. and most of them align with what we have and do. My opinion (just an educated opinion) is that he's prepping them for a merger with us.

Time will tell. I think we will hear something before year's end.

flyingdutchman1

Sun Country hired a Jude for one reason, to make them as much money as possible. Jude knows only one way to make a ton of money and that happens to be the same way Allegiant does things. I don’t think it has to do with him wanting to sell them to Allegiant. It has more to do with that is all he knows. Don’t make more out of things than they are.

Releasemaster

If you consider announcing the company Christmas parties big news, then that was today's announcement.

Beans

More like, if you consider a hey come to the Christmas party to make up for below par wages and work rules, great news then count me in.

akulahunter

I concur with labbats, EVERYONE there should be talking about being bought... They hired a firm to SELL the airline.

Not saying that we wouldn't buy them or aren't in the running, but the last (completely unsubstantiated) rumor I heard was that they were asking WAY too much.

KC135

Where do you work at Beans? Rates were somewhat close to average when signed, topped out higher than DAL and SWA at the time.

crxpilot

From seeking Alpha:


Pledge Allegiant

Nov. 13, 2017 4:10 PM ET|2 comments| About: Allegiant Travel Company (ALGT)
Roger Gaebel
Roger Gaebel
Long only, value, bonds, growth at reasonable price

(3 followers)
Summary

Insider buying at Allegiant Travel.

Significant changes in strategy underway.

Key investor presentation later this month.

All point toward buying opportunity for retail investors.

Introduction

A few weeks ago, the President and Director of Allegiant Travel (ALGT), John Redmond, purchased 11,000 shares of his company's stock for about $1.5M. The news led me to flip through the pages of my favorite investment books to find out what Mr. Redmond's purchase may mean for ordinary investors.

I found it on page 127 of Jeeva Ramaswamy's "Creating a Portfolio Like Warren Buffett"¯, (John Wiley & Sons, 2012). The author advises investors to examine closely insider buying activity because no one knows the company better than an insider. He goes on to say that insiders buy when they feel the stock is undervalued or is fairly valued, but the company's prospects are going to improve significantly.

In this article, I'll explore which of the two it might be and recommend whether to take the pledge as Mr. Redmond has done.

Business Description

Founded in 1997 and with an IPO in 2006, Allegiant is an ultra-low-cost carrier (ULLC) providing scheduled air transportation on limited-frequency flights between under-served cities and popular leisure destinations. As of October 2017, the company operates 89 jet aircraft along 405 routes that serve 119 cities.

The company employs about 3,700 people of which about 50% are unionized pilots and flight attendants. ALGT also sells hotel rooms and rental cars to its passengers and provides an unspecified number of charter flights all of which are reported under one segment.

Industry Overview and ALGT's Competitive Positioning

The airline industry is highly competitive, marked by high fixed costs and low profit margins. Passenger demand and fare levels have historically been influenced by a wide variety of factors which include the health of the economy, industry capacity, pricing actions among competitors, and fuel prices. Regarding the latter, the cost of fuel accounted for approximately 19.2% of total operating expenses of airlines in 2016, while in 2015, that cost accounted for 27.3%, according to the International Air Transport Association. While many airlines hedge fuel costs, ALGT has not done so for several years.

While customers value quality service and on-time performance, air travel is essentially a commodity with travelers, particularly leisure travelers, making decisions based primarily on price.

According to filings, Allegiant competes with US legacy airlines and their affiliated regional carrier, low cost carriers like JetBlue (NASDAQ:JBLU) as well as other ULCCs such as Spirit Airlines (NASDAQ:SAVE). It competes indirectly with Southwest Airlines (NYSE:LUV).

ALGT tries to position itself among its competitors through a four-pronged strategy. First, it focuses exclusively on leisure travelers. Second, it attracts those travelers by connecting under-served cities (e.g. Bismarck, ND, Grand Island, NE) with popular vacation places (e.g. Las Vegas, Arizona, Florida) often flying to smaller airports located near vacation hotspots (e.g. Orlando Sanford International Airport, Phoenix-Mesa Gateway Airport). Thirdly, since it doesn't compete for business travelers, it flies infrequently to and from those destinations as it picks and drops off its passengers every couple of days, often on a seasonal basis. Finally, the airline operates older aircraft than its competitors which are less expensive to purchase.

Financials

ALGT has, pardon the pun, fared well as indicated in Tables 1-3 below. Noteworthy is that its profit margins have been higher than its competitors over the past two years as has adjusted ROE. (To compute ROE adjusted for Financial Engineering: On balance sheet, convert treasury stock to a positive number. Add it to shareholder equity. Then divide net income to new shareholder equity.)

Airline

NI/Sales

Sales/Assets

Assets/Liabilities

ROE

ROE (Adj. for Financial Engineering)

Allegiant

0.16

0.9

3.53

0.51

0.22

Spirit

0.11

0.8

2.26

0.21

0.16

JetBlue

0.11

0.7

2.36

0.20

0.17

Table 1 - 2016 DuPont ROE

Airline

NI/Sales

Sales/Assets

Assets/Liabilities

ROE

ROE (Adj. for Financial Engineering)

Allegiant

0.17

1.0

3.86

0.65

0.27

Spirit

0.15

1.04

2.07

0.32

0.24

JetBlue

0.11

0.78

2.70

0.22

0.19

Table 2 - 2015 DuPont

Airline

NI/Sales

Sales/Assets

Assets/Liabilities

ROE

ROE (Adj for Financial Engineering)

Allegiant

0.08

1.05

4.23

0.34

0.14

Spirit

0.12

1.39

1.60

0.26

0.22

JetBlue

0.07

0.77

3.1

0.16

0.15

Table 3 - 2014 DuPont

Financially, the company is carrying a high debt load. Its debt to equity ratio is 1.78 compared to the industry average of 1.3. Long-term debt to net income over the past 12 months is 5.49. Analysts consider anything above 5.0 as a potential solvency warning flag. On a more positive note, since it buys its aircraft, it incurs no long-term lease obligations.

Turning to airline-specific metrics, load factors for all three airlines are about 85%. As for revenue per available mile (RASM) and cost per available mile (NASDAQ:CASM), ALGT is the middle of the pack with 2016 RASM and % change since 2014. Allegiant is middling too for 2016 CASM although to its credit, the company has been able to drive CASM down 27% since 2014.

Airline

2016 RASM (cents) Higher is better

2016 RASM compared to 2014 (% change)

2016 CASM (cents).Ā Lower is better

2016 CASM compared to 2014 (% change)

Allegiant

10.89

-15

8.02

-27

Spirit

9.11

-23

7.37

-24

Jet Blue

11.21

-6

9.92

-.16

Table 4 - RASM and CASM

The favorable trend in CASM, however, will not likely continue. In their latest quarterly filing, ALGT reported a CASM for the nine-month period that ended on September 30, 2017 of 9.08 cents with salaries up almost 20% compared to a nine-month time frame that ended on September 30, 2016. The salary increase is the result of a collective bargaining agreement with pilots, which went into effect in August 2016, as well as costs associated with a 12.7 percent increase in the number of full-time equivalent employees.

What Does Mr. Redmond See?

This brings us to whether investors should follow Mr. Redmond's lead. Did Mr. Redmond buy because he thinks the company is undervalued? A cursory look at the bottom row of Table 5 below does not appear to bear this out.

Airline

Forward P/E

P/B

P/S

EV/EBITDA

Allegiant

12.9

4.5

1.5

7

Spirit

9.9

1.6

1.0

5.3

JetBlue

10.1

1.5

0.9

4.5

Industry Avg.

12.2

2.9

0.9

unknown

Difference btw ALGT & Industry Avg.

+6%

+55%

+66%

N/A

Table 5 - Relative Valuation ALGT, Peers and Industry

There is, however, a relatively straight forward way to drill down deeper, using P/B, to determine whether ALGT is undervalued and thereby avoid making guesses future sales and earnings. ALGT's book value per share is $29.62. If we assume ALGT is no better or worse than its peers in the largely commoditized industry, then its stock price should be $85.89 ($29.62 x industry P/B average of 2.9). Yet as of this writing, the stock was selling for $127.00 which represents about a 50% premium over a no better, no worse value of $85.89.

Is ALGT that much better? To answer that question, we need to look at ROE. The average industry-wide ROE (not adjusted for financial engineering) from 2014 to 2016 according to csimarket.com was 0.40. ALGT's for the same time frame was 0.50. (Refer back to Tables 1-3.) That means ALGT's ROE was 25% better than the industry as a whole. Based on this information, one could reasonably add that 25% premium to the no better, no worse than price of $85.89 which would bring the price up to $107.36. But even by doing so, the stock still appears to be about 18% overvalued to its current selling price.

So, could it be that he thinks his company is fairly valued at $127.00 and its prospects are even going to improve more? He may be on to something here.

While ALGT has paid relatively bargain prices up front for older aircraft, it has paid higher costs over time to maintain these aircraft, particularly the MD 80 series. Since taking over in late 2016, Redmond has accelerated plans to retire the MDs and transition to an all Airbus (OTCPK:EADSF) fleet. During an October 2017 earnings call, the company stated its intent to complete this strategic change by the end of 2018, almost a full year earlier than previously planned

Aircraft Type & Number

Number as of 9/30/17

Number as of 9/30/16

Number as of 9/30/2015

MD-80/88/83

40

48

51

B-757 (200)

2

4

6

A-319

21

15

7

A-320

26

16

10

Total

89

83

74

Table 6 - ALGT's Changing Fleet

Perhaps what he sees in the transition is a return to 2015 profit margins and asset turnover ratios (Refer back to Table 2) or perhaps even better results. In the airline industry, asset turnover, specifically fixed asset turnover (FATO) (Sales/fixed assets, primarily aircraft) is a closely watched measure of operating performance. As indicated in the table below, ALGT's FATO has been going down year over year, the result of greater changes in the denominator as the company buys more and newer planes. These investments should begin to kick in over the next couple of years with FATO ratios rising.

Year

FATO

TTM

1.22

Ending 12/2016

1.38

12/2015

1.55

12/2014

1.91

Table 7 - ALGT Fixed Asset Turnover (FATO)

But could it be that Redmond, who prior to coming to Allegiant had over 20 years of senior management positions in the hotel and none in the airline industry, sees his company's future earnings coming from something other than air travel? Yes! Redmond envisions ALGT will transport leisure travelers to their vacation destinations and own the destinations as well.

The plan is already unfolding on the Florida Gulf Coast where the company plans to build a 22-acre "Sunseeker" resort with a 75-room hotel, condominiums, bars and restaurants in Port Charlotte. The property, when finished in late 2019 or 2020, will include North America's largest private-resort swimming pool. Looking further ahead, an August 2017 Bloomberg piece citing comments by Mr. Redmond said the Sunseeker property is a bid to begin managing other leisure-destination hotels for fees, further diversifying its revenue. Redmond, deferred questions on Sunseeker during the October earnings call telling analyst they'll have to wait until a November 29th investor presentation to learn more.

Recommendation

I'm inclined to buy into Redmond's vision, but I'll wait a bit as the market is not enthralled with the company. Short interest in the stock is 9%. Rather, I will wait for the market's reaction to Redmond's presentation later this month. If the reaction is positive, I'll likely buy even if the stock rises as a result of the presentation as it's down about 30% from its 52-week high.

Summary

Insider buying is often a positive sign. As Ramaswamy says, who else knows more about a company that insiders? Redmond's purchase coupled with likely improving financials owing to a transition to a newer fleet and the possibility of a future combined airline and hotel/real estate development company suggests investors who follow Redmond's lead won't be disappointed.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

ecam

JR purchased $1.5m in stock eh? Did he purchase it outright, or was it a transfer to pay for the 22 acres he bought in Port Charlotte under his own name?

Or was it an incentive grant he was given when he signed on here a year prior, which just now vested?

I wouldn't think a key figure would make a prominent buy right before a major merger/acquisition that they are attempting to keep under wraps. So I would conclude this is just a course of business and not necessarily a sign of anything big in and of itself. But I still stand by my earlier predictions. November 29th should be interesting.

At this point I should also state that I am not in management at Allegiant Travel Company, do not own any company stock, and have no plans to buy any. Everything I've said is strictly my personal opinion, and have no insider info. I don't want the FBI and SEC knocking on my door either.

Releasemaster

I beg to differ. There is opportunity to fit G4 fleet into the existing Big 3. DL is getting new planes, but all with larger capacity than G4, which could be used to maintain and grow small and medium demand routes. UA is on the hunt for A319s and I'm sure they could make use of the 320s, either as replacements for their older 320s or trade ins towards 321s. AA could use the G4 fleet to grow the small main line jet fleet with the 319s, particularly with the 190s leaving and scope limits. Believe it or not, there is a way for them to capitalize on the 320s. They could easily replace the ancient AA 320 fleet and with an increase in the 738 seating capacity, would open up more markets that can support a 150 seat plane but not always a 170ish seat plane.

Also, if the airline is sold, there is no guarantee that any of the current "hubs" will be kept. More than likely the travel part of G4 will have a deal with whoever buys the airline to have an exclusive travel booking relationship to wherever they fly. Also, the current G4 hubs are not exactly attractive to a lot of existing airlines, they can all be serviced easily via nearby major airports and the few major airports G4 hubs in such as LAS and LAX will be a draw back. LAS because the G4 gates are on the older terminal that houses most ULCC activity and there would not be enough there to house a sizable LAS fleet and existing traffic, Plus very few, if any airlines would be enticed to vacate D or T3 to head over to A/B gates. LAX and FLL have so few G4 gates, there wouldn't be a lot to gain in the overall size of those airports operations unless, it went to operators with already sizable presence at those locations.

akulahunter

So Indigo is trying to corner the market on new A320 NEOs (430 is a lot of planes to buy), think they will have any old ones to sell us?