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In December 2023, Allegiant Travel Company (NASDAQ:ALGT) opened its much-anticipated Sunseeker Resort, diversifying Allegiant’s business which, prior to its opening, was primarily focused on passenger transportation and, to a lesser extent, resort revenue.
The company provided its first quarter results on May 7, 2024, providing insight into Sunseeker Resort’s performance and expectations. The results beat analysts’ revenue estimates by $11.18 million and beat EPS estimates by $0.12. Although the results beat analyst estimates, I found the earnings somewhat disappointing. In this report, I explain why I was not entirely satisfied with the results and update my price target for the stock.
Allegiant Travel Company is stuck in a cost trap
Allegiant Travel Company
Total revenues increased 1%, while a $17.2 million decline in airline revenues was recorded. more than offset by Sunseeker’s revenue growth. The new complex, however, is off to a rocky start as its December opening was far from the ideal time to open. While the Sunseeker Resort has potential for Allegiant Travel Company, it obviously requires some learning curve to find the right ways to market, price and promote. For the full year, the company now expects an EBITDA loss of $15 million for the station.
The reason why the results did not convince me is above all the performance in the airline segment. While revenue decreased by $17.2 million, we saw costs increase by $56.2 million despite a lower fuel bill. This was mainly due to a $42 million salary increase. Capacity only increased 2%, so we see that modest capacity increases don’t really help Allegiant Air stabilize its costs or revenue. Total passenger revenue per available seat mile decreased 4.8% while non-fuel unit costs increased 18.5%. So what we’re seeing is that due to attrition, Allegiant Travel Company hasn’t quite been able to increase their capacity and the company has now increased their salaries, but they are increasing the cost base more than Allegiant apparently can increase its capacity without compromising unit revenue and yield.
What is Allegiant Stock Price Prediction?
The Aerospace Forum
Much of the year will be spent on Allegiant reducing unit costs, which it hopes to achieve by the fourth quarter as modest capacity growth adds to easier competition. The Sunseeker Resort will be in ramp-up mode this year, and I think it will be 2025-2026 before we see prices and occupancy at targeted levels. Based on my expectations that Allegiant will continue to leverage debt in the coming years to hold a minimum of $400 million in cash and cash equivalents and a broader than normal period of time to evaluate its performance relative to the benchmark, I rate the stock a Buy. with a price target of $76.76 representing an upside of 43%. However, the risky nature of the investment opportunity must also be highlighted given the cost issues faced in passenger airline operations as well as the learning curve and ramp-up of the Sunseeker Resort, this which makes it a speculative purchase.
Conclusion: a difficult year for the Allegiant travel company but with prospects
I think 2024 will be focused on controlling airline costs while trying to improve Sunseeker Resort’s bottom line. The Sunseeker Resort has a lot of potential, but it will take some time to reach its full potential. All risks considered, I believe Allegiant Travel Company is a speculative buying opportunity with significant upside potential.
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