Were Allegiant Travel's Results Really That Bad?

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A day after absorbing an 11% loss, Allegiant Travel (NASDAQ: ALGT) shareholders should spend a minute reviewing the results that caused the selloff. Were the second quarter numbers really bad enough to justify the stock plunge?

The company focuses on low-cost travel to leisure destinations and has seen a dramatic stock increase since the middle of 2011.

Before digging too much into the numbers, it is worth reviewing the headlines that led to the downdraft in the stock. The majority of the news suggested that revenues were solid, but earnings evidently came up a few pennies short of analyst expectations. Investors need to note that Allegiant is an airline that traded at roughly 20 times current year earnings estimates before the quarterly report was released. With analysts expecting roughly 20% long-term growth, the stock can’t afford to suffer a detour from those expectations to expect a continuation of that valuation.

Reviewing Q2 results

The media and traders tend to focus more on the headline numbers such as revenue and the listed earnings and that can greatly impact the stock results over the first day or two. Long-term, real investors dig into the numbers such as cash flows or EBITDA to understand what drove those headline numbers.

In the case of the Q2 2013 results for Allegiant, the company reported earnings of $1.34 that missed the $1.36 estimates. Note that these numbers are only slightly above the $1.30 numbers from Q2 2012. Right away investors need to understand the reasoning for the slowdown in earnings growth. More importantly, anybody reviewing the initial table provided by the company in the press release should aspire to understand the reasons for revenue and EBITDA growing at a comparable nearly 11% clip, while operating income and net income only sputtered towards slightly above 2% growth.

Reading the press release, it is clear that the company has accelerated some depreciation charges related to old MD-80 planes and is incurring extra charges and reduced efficiency from bringing on a fleet of modern Airbus planes in the form of A319s and A320s. By the end of the year, the company will have 10 such planes after starting the year with none.

With additional research, the reason that EBITDA surged is due to the substantially higher depreciation charges. Investors will have to come to grips with whether accelerated depreciation is worthy of losing faith in a stock. Surely investors didn’t expect the company to remain focused on an aging MD-80 fleet.

Others impacted?

With the revenue and EBITDA intact, it’s difficult to see these numbers impacting other airlines. Republic Airways Holdings (NASDAQ: RJET) declined 2.7% and SkyWest (NASDAQ: SKYW) had a minimal drop on the first day of trading. Neither airline has the high earnings multiple or revenue growth expectations of Allegiant to expect any significant impact from an earnings miss by that company. In general, the whole airline industry trades at sub-market earnings multiples, providing plenty of cushion for a miss.

Republic Airways only trades at 7 times forward earnings though part of the low multiple is dependent on earnings soaring from $1.11 in 2012 to $1.77 in 2014. SkyWest trades at the higher 10 times forward multiple though analysts expect a similar earnings surge from $0.99 in 2012 to $1.47 in 2014.

New aircraft focus

The whole industry is making a move towards newer and more energy efficient airplanes so the results from Allegiant could be a warning that a transition to a new type of airplane could by an issue.

SkyWest recently made a huge order for new Embraer E175-E2 aircraft that burn at least 16% less fuel per seat. Frontier Airlines in the Republic Airways group received its recent A320 with sharklets that will save fuel as well.

With SkyWest not expecting those Embraer planes for years and Republic Airlines already flying Airbus planes, it doesn’t appear that other airlines will face a similar impact of going from an antique like the MD-80 to a modern airplane.

Bottom line

The Allegiant earnings miss appears to be as much an accelerated depreciation charge and additional expenses from moving to a more modern fleet than anything that should impact other airlines. Not to mention, Allegiant had one of the highest multiples in the industry so the 11% stock cut was as much to do with a lofty valuation as anything else.

Warren Buffett has claimed that investing in airlines is a surefire way to lose your hard-earned cash. But two airlines are breaking all the rules by keeping costs low and avoiding direct competition -- leading to enviable profits. Click here to learn how these two airlines are leading a revolution in the industry, and discover whether they can keep delivering big gains for shareholders!

Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus