Wednesday, July 22, 2009

Bookkeeping: Allegiant Travel (ALGT) Does Not Please on Earnings

First a bookkeeping note - I am cutting most of my Allegiant Travel (ALGT) around $42.80. It has been all the over the map today from $41.50s to $43.50s - this name can move a lot on very little volume. I had a quite large loss on this name that has turned into a small loss and I want to keep it that way for now; I'll forgo any more upside until I see how the market reacts after the knee jerk move down. We're down to just a placeholder position at 0.1% - this last batch mostly went out at a 12-15% loss, including todays 6-7% drop.

My 'trusty' source for knowing when stocks report earnings, Yahoo Finance, must of not had Allegiant Travel (ALGT) on the radar since I was not aware yesterday was the day. (8:44 PM no less) My staff of analysts (zero) also did not alert me to this event. So when I saw the stock down sharply this morning I could only assume oil was up 5%... but instead it was an earnings report. My first scan of the report turned up these words:

During the quarter we saw a steady degradation of the revenue environment, year-over-year, from April through June. However, we are hopeful June may mark the bottom of revenue softness.

Which I assume is the source of today's weakness. A bit surprising actually considering their data points for Q2 two weeks ago looked very positive [Jul 9: Allegiant Travel Continues to Post Solid Numbers - June] just released. I don't see anything so awful in the report to justify this move down, but the market shoots first, asks questions later. Earnings were essentially in line with estimates (which is great considering oil had jumped so much in the 2nd quarter!) and the valuation is still a cheap 10x 2009 estimates. That said the stock was even cheaper 3 weeks ago when it was in the mid $30s - I keep repeating it but valuation seems to mean little nowadays. All about momentum and sectors.

Allegiant is one of the few companies I own that has any real exposure to the degrading US consumer. The irony of course, dear readers, is so many stocks tied into the US consumer are flying again (pardon the pun) as "recovery is soon here!". We own a few names of this nature, but only to take advantage of a thesis I don't believe in but the market has been insisting on driving up for now the 6th or 7th attempt since early 2008. The market "wants" the consumer to be back, so if he is or is not, it does not matter. Perception is reality in the stock market, and as long as enough hot money insists the consumer will be back - the stocks go up. Even if 2-3 months later it is found to be a fraud - as all attempts to drive up consumer discretionary in the past were found to be. Oh well, as long as Starbucks (SBUX) is "thriving" with -5% same store sales, instead of -8%, I guess all is well with the American consumer. Mmm, 23x forward estimates for a mature coffee company - sounds viable.

I hesitate to post a chart for Allegiant since in the year we've been following, it does not respect squiggly lines and moves to its own drummer.... but for our amusement if nothing else. It "should" be ok as long as it holds $41.50 area, but to repeat - I've only lost money by trying to use technical analysis on ALGT. It's just a name you need to buy when its hated, no matter what the chart says, and sell when it goes on one of its typical nonstop runs.

A few other tidbits from the ER - and please keep in mind it is all RELATIVE; compared to any other airline except perhaps 1 other, these numbers are in a completely different league even if some weakness is percolating. Here you have a company EXPANDING in a terrible environment, and remaining profitable while expanding - while we are rewarding companies for shrinking to prosperity by doing nothing more than cutting heads left and right, and giving them 20, 30x forward multiples. ALGT has a 10x. Gotta love stock market logic.
  • "We had another very good quarter, our third highly-profitable quarter in a row," stated Maurice J. Gallagher, Jr., CEO and President of Allegiant Travel Company. "In these extremely difficult times when our industry has substantially reduced its operations and seen record declines in unit revenue, we are pleased to report these quality numbers. We increased scheduled departures and ASMs by 30% year over year and still posted a 25% operating and pre-tax margin.
  • "During the quarter we substantially increased the size of our nationwide footprint, including the successful start of 13 new routes to our new Southern California base in Los Angeles and an additional seven new routes across the network, ending the quarter at 134 routes between 71 cities. This further diversifies our exposure to regional economies and offers more protection to us in these uncertain times.
  • Our Southern California routes are off to a great start, with July booked load factors now running ahead of our scheduled average.
  • "We achieved our second quarter results despite an almost 13% reduction in our average scheduled airfare from the first quarter of this year, a decline attributable to a softer economy, the introduction of new routes, and a 15% increase in year-over-year capacity on a 'same-store sales' basis in existing markets.
  • Moreover, for the first time in a number of years, our ancillary revenue per passenger declined sequentially, albeit slightly, to $32.36.
  • An additional challenge relative to the first quarter was a 13% sequential increase in the price per gallon of fuel.
While the ancillary revenue drop is now great, there is only so much you can nickel and dime customers for before you run out of ideas. So it was bound to stagnate. All in all, I continue to find this management doing a good job of running a business during the worst post world war 2 recession, as well as during an era hedge funds run up the price of oil +/- 50% a year. Tough to run a business when one of your top costs moves like a penny stock. My only beef, which I have repeated is they should of loaded up on oil hedges under $50; just not part of their business plan.

See their expense control... fantastic.
  • Andrew C. Levy, CFO & Managing Director - Planning, stated, "We had terrific cost management in the second quarter. Cost per passenger excluding fuel declined to $46.38 in the second quarter from $47.52 in the prior year and $49.62 in the first quarter. Moreover, these figures include bonus accrual, which has increased substantially in 2009 since it is tied to profitability and therefore disguises underlying cost improvement. Excluding bonus accrual, our cost per passenger excluding fuel declined to $43.84 in the second quarter from $47.26 a year ago and $46.23 in the first quarter.
And while Q2 showed increasing weakness in revenue, it appears to be holding up thus far in July:
  • Fares for July, including ancillary, are, thus far, trending slightly upwards, despite the large year-over-year capacity increase we have in this month. An improvement in the revenue environment as well as the recent moderation in fuel prices will help us to extend strong year-over-year earnings growth into the third quarter, historically the seasonally weakest of the year," concluded Gallagher.
And what other airline is not only not in debt up to their eyeballs (except right after coming out of a bankruptcy) but actually is buying back shares? Unfortunately they bought at pretty high prices (ave $41.25) - going to hire Cramer in there to get them much better timing on purchases. "Buy buy buy!"
  • "Lastly, our Board of Directors recently approved an increase of our existing $25 million authority in our Common Stock repurchase program by $10 million to a total of $35 million. Under the share repurchase program our Board of Directors approved in January 2009, we spent $10.5 million in open market transactions during the second quarter to acquire 255,350 shares of the Company's Common Stock at an average price of $41.25 per share.
  • Including open market transactions in the first two quarters of 2009, the Company has repurchased a total of 465,525 shares at an average price of $37.79 returning a total of $17.6 million to our shareholders. With the additional $10 million of authority to repurchase shares that we recently received from our Board of Directors, we currently have $17.4 million in unused authority remaining for open market purchases under our current Common Stock repurchase plan."
  • Allegiant Air expects third quarter 2009 year-over-year departure growth of approximately 30% and ASM growth of approximately 35%.
  • Allegiant Air expects fourth quarter 2009 year-over-year departure and ASM growth of approximately 20%.
  • Allegiant Air expects full-year 2009 departure and ASM growth of at least 20% over 2008.
  • Allegiant Air expects to operate 46 aircraft by the end of 2009.
Las Vegas-based Allegiant Travel Company (Nasdaq: ALGT - News) is focused on linking travelers in small cities to major leisure destinations such as Las Vegas, Orlando, Fla., Tampa/St. Petersburg, Fla., Phoenix-Mesa, Los Angeles and Fort Lauderdale, Fla. Through its subsidiary, Allegiant Air, the Company operates a low-cost, high-efficiency, all-jet passenger airline offering air travel both on a stand-alone basis and bundled with hotel rooms, rental cars and other travel related services.

[May 5, 2009: Allegiant Travel Surging April Traffic and 2.3M Share Offering]
[Apr 20, 2009: Allegiant Travel Continues to Impress]
[Feb 19, 2009: Allegiant Travel in Wall Street Journal]
[Feb 4, 2009: Allegiant Travel Position Started]
[Jan 27, 2009: Allegiant Travel Continues to Execute; Buyback Announced]
[Jan 7, 2009: Allegiant Travel December Traffic]
[Jan 5, 2009: Beginning Allegiant Travel] (old portfolio)

Long Allegiant Travel; no personal position

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