The one new stock that has not been in the portfolio in the past is Allegiant Travel (NASDAQ:ALGT). ALGT is a no-frills, discount airline operator that caters to the budget-minded leisure customer. One way ALGT saves money for its passengers is by flying into and out of smaller regional airports. For example, instead of flying into Orlando International Airport in Florida, ALGT operates out of the Orlando Sanford International Airport, which is roughly 25 miles north of the bigger international airport. Further, because of its unique focus on smaller airports and cheaper, used aircraft, 81% of ALGT’s scheduled routes have no competition. ALGT also is transitioning its fleet to Airbus A319 and A320 planes. Those planes are fuel efficient, and they use the similar engines and parts, which allows for much lower maintenance costs.
ALGT has declined roughly 30% from its peak a couple of years ago, partly due to flight operation issues with its older MD-80 planes, and partly because of lower operating profits tied to rising operating costs as the company invests in its fleet transition and future route expansions. We believe the MD-80 issues are short term and will cease once the company fully transitions to the Airbus A319/320s. Furthermore, as ALGT expands the number of routes it flies, we believe that revenues will increase. We assume no material change to operating profit margins, but earnings could rise substantially as the number of paying customers increases. To that end, on June 20, the company announced 28 new routes and service to three new cities. We believe revenues from this expansion will start later this year and accelerate in 2018.
Once ALGT transitions to the A319/320 platform and achieves a similar load factor on its new routes that it realizes on its existing routes, we believe the base-case EPS will be roughly $16.70. Earnings would rise to approximately $19.20 in our up-side case, which assumes ALGT is successful in further expanding its route schedule by adding 15 planes to the 110 planes in our base case. Thus, at $150 a share or below, we believe ALGT provides the Fund’s shareholders a reasonable reward-to-risk opportunity.
From FPA Capital's second quarter 2017 shareholder letter.
