Legendary investor Warren Buffett had warned us against investing in the airline business. He mentioned that the airline industry has brought negative aggregate value for investors since the time of the Wright Brothers. Billionaire Richard Branson also advised: “If you want to be a millionaire, start with a billion dollars and launch a new airline.”
However, while scanning through a Forbes list of 100 America’s Best Small Companies, I noticed one passenger airline operator, which experienced a decent rise, from $30 per share at the beginning of 2007 to nearly $87 per share, an annualized gain of 19.4% in around six years. It is Allegiant Travel Company (NASDAQ:ALGT).
Unique business model
Allegiant Travel Company (NASDAQ:ALGT), founded in 1997, is considered a leisure travel company, providing travel services and products to residents of small cities in the U.S. The company operates a low-cost passenger airline for leisure travelers in small cities. The company said that it had a unique business model compared to other traditional airlines.
While traditional airlines focus on business travelers, providing high frequency service, and their services are sold through different intermediaries, Allegiant Travel Company (NASDAQ:ALGT) concentrates on leisure travelers, providing low frequency service from small cities. Its services are sold directly to travelers without involvement in global distribution systems.
Consistent growth and high profitability
Since 2007, Allegiant Travel Company (NASDAQ:ALGT) has experienced consistent growth in both its top line and bottom line. Revenue increased from $361 million in 2007 to $909 million in 2012, while net income rose from $32 million, or $1.53 per share, to $79 million, or $4.06 a share, in the same period.
EPS has grown at a faster rate than net income due to the declining number of shares outstanding, from around 21 million to 19 million in the past six years. Interestingly, Allegiant Travel Company (NASDAQ:ALGT) has generated consistent operating cash flow, climbing from $74 million to $177 million, while the free cash flow has been on the rise, although fluctuating, from $32 million to $72 million during the same period.
What interests me is the double-digit return on invested capital that the company has generated since 2008 — in the range of 10% to 23.2%. In 2012, its ROIC stayed at 13.94%.
With a conservative capital structure
Allegiant Travel Company (NASDAQ:ALGT) has managed to deliver an improving operating performance without a lot of leverage. Its balance sheet looked quite strong. As of December 2012, it had $400 million in total stockholders’ equity, $329 million in cash and short-term investments, and only $140 million in both long and short-term debt. Since 2008, the company has spent around $86 million to repurchase its shares.
The most profitable and the highest valuation
At around $84 per share, Allegiant Travel is worth around $1.6 billion on the market. The market values Allegiant Travel at 7.9 times EV/EBITDA. Compared to its peers, including Southwest Airlines Co. (NYSE:LUV) and JetBlue Airways Corporation (NASDAQ:JBLU), Allegiant Travel is the smallest company, but it has the most expensive valuation.
Southwest Airlines, at around $13 per share, has a total market cap of $9.5 billion. It is valued a bit cheaper at 6.1 times EV/EBITDA. JetBlue Airways Corporation (NASDAQ:JBLU) is trading at nearly $6 per share, with a total market cap of around $1.7 billion. It also has a lower valuation than Allegiant Travel, at 6.5 times EV/EBITDA.
Allegiant Travel seems to deserve a higher valuation than the other two peers, as it is the most profitable company. It has the highest operating margin at 15%, while the operating margins of Southwest Airlines and JetBlue Airways Corporation (NASDAQ:JBLU) are only 4.7% and 7.2%, respectively. Allegiant Travel also delivered the highest return on invested capital at 13.94%. Southwest Airlines ranked second with 3.25% ROIC, while the ROIC of JetBlue Airways Corporation (NASDAQ:JBLU) is the lowest, at only 0.52%.
My Foolish take
With a strong balance sheet, unique business model, consistent revenue, and earnings growth, Allegiant is the most profitable company and is reasonably valued. These factors lead me to believe that Allegiant could be a buy at its current price.
The article An Airline for Investors to Consider originally appeared on Fool.com.
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