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Jonathan Poland
Jonathan Poland
Articles (241)  | Author's Website |

Dollar-Cost Average on Allegiant Travel

Buy more stock in solid companies when trading at lower prices

September 19, 2017 | About:

Last November, I wrote an article on Allegiant Travel Co. (NASDAQ:ALGT) when the stock was trading at $160 per share. Now off 23%, the company’s dividend, earnings multiple and long-term prospects look just as good on the business side.


Now is the time to dollar-cost average as the company’s stock remains a value trade. Here’s my thesis in seven points.

First, the company reported solid second-quarter results with earnings of $2.94 per share on $400.6 million in sales thanks to total revenue per available seat mile (TRASM) being up 3.5% year over year. This money came from flights that cost between $39 to $78 one-way. Granted, passengers are limited in the number of destination cities, but that is actually what investors should like about the airline. It has not overextended to compete with national and international carriers.

Second, it repurchased $85 million worth of stock throughout the first six months of this year, already more than it bought back in 2016. Allegiant also pays out a pretty hefty dividend, 26% of profits, $2.80 in the last 12 months.

Third, Allegiant plans to transition to an all Airbus (XPAR:AIR) fleet in the next two years, striking an agreement with the Aviation Lease and Finance Co. (KUW:ALAFCO) to help make it possible. New planes help with fuel efficiency, maintenance and higher seat capacity to keep profit growing.

Fourth, the company is adding new routes to accommodate growth across passenger traffic, recently launching eight nonstop flights from the Phoenix-Mesa Gateway Airport to major Midwest destinations such as Indianapolis, Kansas City, Omaha and Milwaukee.

Fifth, the company has generated solid growth in sales, earnings and book value, while buying back 23% of its stock. Plus, the returns Allegiant generates on equity (38%), assets (10%) and invested capital (22%) are truly extraordinary. If management can keep this up for the next five to 10 years, the long-term prospects remain extremely high.

Sixth, Jim Simons (Trades, Portfolio)’ Renaissance Technologies has been reducing its stake but still owns over 7% of the company with 1,135,500 million shares. It is likely the company will earn $12 a share in 2018, potentially building that up to $15 by the end of the decade.

Seventh, all the stock needs is for the price multiple to be revised higher and the stock will be $200 per share or more. If that happens by the end of the decade, investors will see at least 15% annualized growth.

All in all, these add up to a stock worth buying more on the way down. My favorite strategy is to allocate the same amount of capital to each position. Thus, if you bought 100 shares at $160, you would buy 130 shares at $123 for a new cost basis just shy of $140.

Disclosure: I am not long or short ALGT.

About the author:

Jonathan Poland
Thanks for reading! I'm a former money manager and financial publisher who has helped investors produce market beating results for more than 15 years.

Visit Jonathan Poland's Website

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