While airline stocks have benefitted significantly from the pent-up travel demand, the sector continues to grapple with challenges threatening to weigh down demand. In this context, I have discussed why investors should watch and wait for an entry point in Allegiant Travel Company (ALGT), while fundamentally weak airline stock Virgin Galactic Holdings, Inc. (SPCE) could be best avoided.

Despite economic ambiguity and dwindling household savings, the post-pandemic travel surge showed no signs of slowing down. Ticket costs remain high, indicating a strong momentum that is likely to continue throughout the upcoming year.

As per data from the U.S. Travel Association, total travel spending was up 4.7% year-to-date through June 2023. Heading into the busy summer travel season, air travel demand increased 12% year-over-year in June. According to a Moody’s Investor Service report, overall global passenger demand is expected to grow 22% year-on-year in 2023 and 6% in 2024.

However, as we enter the latter half of the year, the airline industry is experiencing some turbulence. While the first half showed promising results, there are now signs of caution ahead.

Although travel reached record levels over the bustling 4th of July weekend, a series of delays, cancellations, and recent fluctuation in booking trends have raised red flags. Furthermore, rising capacity pressures, delivery delays on new aircraft orders, staff shortages, and higher ticket prices add to this turbulence.

According to the U.S. Travel Association’s biannual forecast for travel to and within the United States through 2026, domestic leisure travel is expected to normalize from the post-pandemic surge.

Given this backdrop, investors could keep an eye on fundamentally sound airline stock ALGT, while SPCE might be best avoided due to weak fundamentals and bleak growth prospects.

Stock to Watch:

Allegiant Travel Company (ALGT)

ALGT is a leisure travel company that provides travel services and products to residents of underserved cities in the United States. The company offers scheduled air transportation and air-related services and products in conjunction with air transportation. Additionally, it provides third-party travel products, including hotel rooms and ground transportation.

On August 2, backed by its strong financials, the company declared an annual dividend of $2.40 per share, payable in quarterly installments of $0.60, with the first dividend to be paid on September 1, 2023. Its four-year average dividend yield is 0.66%, while its annual dividend translates to a 2.2% yield on prevailing prices.

On July 11, ALGT announced six new nonstop routes to popular vacation spots, including Nashville, Portland, Phoenix/Mesa, and several Florida destinations, with one-way fares as low as $40. While offering low-cost holiday travel options, this strategic move is expected to attract a robust demand from travelers looking for warm winter getaways.

In terms of forward non-GAAP P/E, ALGT is trading at 10.21x, 42.9% lower than the industry average of 17.88x. Its forward EV/EBITDA multiple of 5.73 is 49.1% lower than the industry average of 11.26x. In addition, ALGT’s forward Price/Book ratio of 1.40 is 46% lower than the industry average of 2.60.

ALGT’s total operating revenue increased 8.6% year-over-year to $683.81 million in the second quarter that ended June 30, 2023, while its passenger revenue rose 8.5% from the prior-year period to $642.75 million.

Its operating income improved 411.1% from the year-ago value to $133.43 million. The company’s net income and EPS came in at $88.47 million and $4.80, representing significant increases from the prior-year quarter.

The consensus revenue estimate of $2.55 billion for the fiscal year 2023 (ending December 31) represents a 10.9% increase year-over-year. The consensus EPS estimate of $10.61 for the current year indicates a 238.9% improvement year-over-year. The company has an excellent surprise history, surpassing the consensus revenue estimates in each of the trailing four quarters.

Over the past three years, its revenue and EBITDA have increased at CAGRs of 20.3% and 23.4%, respectively. Likewise, its total assets have grown at a 13.8% CAGR over the same period.

In addition, the stock’s trailing-12-month EBIT and EBITDA margins of 12.38% and 18.43% are 27.1% and 35.9% higher than the industry averages of 9.74% and 13.56%, respectively.

ALGT’s shares have gained 45.7% over the past nine months and 58.8% year-to-date to close the last trading session at $107.98.

ALGT’s POWR Ratings reflect this promising outlook. It has a B grade for Growth. Among the 28 stocks in the B-rated Airlines industry, it is ranked #16. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

To see ALGT’s ratings for Value, Momentum, Stability, Sentiment, and Quality, click here.

Stock to Avoid:

Virgin Galactic Holdings, Inc. (SPCE)

SPCE is an integrated aerospace company that develops human spaceflight for private individuals and researchers in the United States. It also manufactures air and space vehicles. In addition, it designs, develops, manufactures spacecraft, and engages in ground and flight testing and post-flight maintenance of spaceflight vehicles.

In terms of forward EV/Sales, SPCE is trading at 161.38x, significantly higher than the industry average of 1.80x. Also, its forward Price/Sales multiple of 257.44 compares to the industry average of 1.37.

SPCE’s total operating expenses increased 28.5% year-over-year to $141.44 million in the second quarter that ended June 30, 2023. Its operating and net losses widened by 27.2% and 21.3% from the year-ago values to $139.57 million and $134.36 million, respectively.

The company’s net loss per share amounted to $0.46, widening 6.9% from the same quarter the prior year. Also, its adjusted EBITDA loss increased 25.4% year-over-year to $116.06 million for the same period.

Street expects SPCE’s loss per share to increase 20% year-over-year to $0.44 in the fiscal third quarter (ending September 2023). Further, its EPS is expected to remain negative for the fiscal years 2023 and 2024. It failed to surpass the EPS estimates in three of the trailing four quarters. 

SPCE’s trailing- 12-month ROCE, ROTC, and ROTA of negative 103.98%, 36.29%, and 51.46% compare to the industry averages of 13.81%, 6.81%, and 5.08%, respectively.

Over the past year, the stock has declined 51.2% to close the last trading session at $3.24.

SPCE’s POWR Ratings reflect its poor prospects. The stock has an overall rating of F, equating to a Strong Sell in our proprietary rating system.

It has an F grade for Stability and a D for Value, Sentiment, and Quality. Out of 28 stocks in the same industry, it is ranked last. Click here to see SPCE’s ratings for Growth and Momentum.

What To Do Next?

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ALGT shares were trading at $105.36 per share on Friday afternoon, down $2.62 (-2.43%). Year-to-date, ALGT has gained 54.96%, versus a 17.10% rise in the benchmark S&P 500 index during the same period.

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.

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