Friday, August 14, 2009

Allegiant Travel (ALGT) Gets No Love from Barron's

I mentioned yesterday I am having a very hard time finding places to add long exposure - either stocks are in parabolic uptrends (which when they reverse will be extremely ugly) or stocks are slowly breaking down on their charts. Allegiant Travel (ALGT) is an example of the latter; and frankly stocks in the latter category are shorts in the near term, not longs. Since I already have a good lot of short positions I am not adding some of these names breaking down but I could literally add 25 names on the short side who look like this.

In lieu of shorting we have cut many of these stocks with similar charts to 0.1% stakes and will wait for a lower price to add back to the position. If and when I'd like to be a buyer in the $33-$34 range. I just caught this yesterday but Barron's had a negative article on Allegiant (Allegiant May Be Heading for a Turbulent Ride) this weekend; details below - some good points certainly and ALGT always seems to have a cadre of short sellers against it. After all it's an airline :) Overall, a good overview of the pros and cons - the worst case scenario is Ben Bernanke succeeds in inflating commodities through the roof while the US economy does not recover - the stagflation argument I was making early in 2008. This would blast oil prices up while consumers retrench even further.
  • ... one airline has defied the industry's sputtering air traffic trend -- Las Vegas-based Allegiant Travel .
  • Allegiant does things differently from most U.S. airlines. For starters, it makes a good profit, by flying just a few times a week from isolated cities like Bismarck, N.D., to leisure destinations like Las Vegas. Passengers are drawn by advertised low fares, but then spend more than 30 bucks in extra fees.
  • The company's old MD-80 jets guzzle fuel, but it manages to fill more of its seats than other carriers. By focusing on small-town vacationers, Allegiant has stayed out of the way of other low-cost carriers.
  • It's got competition in just six of its 134 routes, notes Chief Executive Maury Gallagher. He likes to joke that his only competition is "the couch."
  • But a fair number of investors have bet Allegiant's lucky streak will run out. Some six million shares were sold short as of last month, which amount to about 40% of the free-trading float and about 14 days' trading volume.
  • That skepticism found voice in Mark Roberts, whose Cambridge, Mass., research shop Off Wall Street Consulting Group put out a Sell rating in January, when shares were near 44. "If everything goes perfectly for them," Roberts says of Allegiant, "they can do OK. But fuel prices are starting to go against them and they won't be able to pass higher prices on through fare increases."
  • With its 20-year-old jets, Allegiant's business is more sensitive to fuel prices than carriers who fly new Boeings and Airbuses. That was actually a good thing in the last 12 months, as the price of jet fuel fell by half. Allegiant's operating profit jumped seven-fold in the just-ended June 2009 quarter (year-over-year) to $38 million, as revenues increased just 13% to $148 million. But 90% of that increase in operating profits resulted from lower fuel costs. Ex-fuel, Allegiant's June-quarter cash flow rose just 4%, Roberts notes, and actually declined 19% per passenger.
This is an issue I have with the company - I wished they had hedged 5 years worth of fuel when oil was in the $40s and stated as much on the blog.
  • Allegiant stopped hedging fuel costs about two years ago, in another break from the industry's conventional wisdom. For much of the past decade, Southwest's managers had looked like commodities-trading geniuses as they boosted profits with fuel hedging. That tactic backfired last year when oil prices fell back from their peak.
  • "Hedging is not all that it's cracked up to be," says Allegiant chief Gallagher. His airline confronts fuel costs more directly, by juggling its fleet and its fares to make sure that its scheduled flights have more than 90% of the seats filled. This industry-high "load factor" means Allegiant's old jets end up using about the same amount of fuel per passenger as a new fleet like Southwest's, whose July load factor was only 83%.
Replacement costs are a factor, but I assume they can but used jets and won't need to buy "new"... i.e. they can buy a 10 year old jet.
  • The aging fleet won't fly forever, of course. When Gallagher finally has to buy new aircraft at prices 10 times what he paid for the used MD-80s, Allegiant's fixed costs will rise and the airline will find it harder to prop up its load factor by parking aircraft during the off-season.
  • ALLEGIANT LURES CUSTOMERS OFF the couch with low fares; the average ticket in the June 2009 quarter was $65, down 22% from June 2008. But long before most airlines charged for baggage, Allegiant succeeded in getting customers to pay fees for such "ancillary" services. Its ancillary revenues had increased every quarter since 2005 from about $12 a passenger to more than $34. Even at Ryanair (RYAAY)-the European airline whose business model Allegiant copied-ancillary fees per passenger average only about $15.
  • But the ancillary-fee bonanza may be over. The airline's June '09 quarter's average per passenger fell sequentially by about $2, to $32. "People are spending differently," Gallagher acknowledges. "They're tighter with a buck." (not according to CNBC)
  • Analyst Roberts thinks that consumers are figuring out how to avoid the extra fees: $14 for the convenience of buying tickets through the company's Website, $5-$25 for a seat assignment, $5 for early boarding and $15-$35 per checked bag. More importantly, he says, Allegiant won't be able to raise fares when fuel prices rise again.
  • Bulls like William J. Greene, an analyst at Allegiant's banker Morgan Stanley, forecast earnings of about $3.55 a share in 2009 and $3.70 in 2010. But Mark Roberts thinks 2010 earnings will be squeezed down toward $2.80 a share if fuel prices rise without an economic recovery. Roberts says that would send Allegiant shares down to $24.
Recent large sale...
  • One astute bull seems to think that Allegiant stock has gotten fully priced. PAR Investment Partners, a Boston hedge fund run by onetime airline analyst Paul A. Reeder III, has been a longtime investor in Allegiant (as well as low-cost rival AirTran). With Morgan Stanley's help, PAR registered to sell half its holdings in May, cashing in a tidy $125 million.
[Jul 22, 2009: Bookkeeping - Allegiant Travel Does not Please on Earnings]
[Jul 9, 2009: Allegiant Travel Continues to Post Solid Numbers - June]
[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 in fund; no personal position

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