Allegiant Travel Shares In Red On Raymond James Downgrade

• Allegiant Travel Company ALGT shares have appreciated 28.57 percent year to date, while declining 7.26 percent over the past three months.
• Raymond James’ Savanthi Syth has downgraded the rating on the company from Outperform to Market Perform.
• Given the modest year on year earnings growth guidance and potential for the consensus forecasts being revised down, Syth expects the stock to remain under pressure over the near term.

Analyst Savanthi Syth believes that there could be 20-30 percent upside potential to the bull-case scenario, “particularly if fuel prices remain lower for longer.”

However, Syth believes that there is likely to be a sharper correction in fuel prices exiting 2016. Allegiant Travel is expected to witness an 8 percent year on year decline in jet fuel prices in 1H16, with a 20 percent increase in 2H15. There is likely to be another 15 percent increase in 2017.

Syth also expects domestic U.S. supply to increase faster than demand once again in 2016. “The level of capacity is not worrying given the large drop in fuel prices. However, if fuel prices were to correct sharply, we believe it will take longer to successfully implement fare increases as a result,” Syth explained.

Allegiant Travel “does not have much direct competition, its demand is more price-elastic,” Syth said, while also mentioned that the company was expected to grow in the low double digit percentage, year on year, even if Brent prices rose to more than $70.

The company is also expected to continue to return meaningful cash to shareholders, while generating $6.22 and $7.63 per share in free cash flow in 2016 and 2017, respectively.

The EPS estimate for 2016 has been lowered by 6 percent to $13.20 due to expectations of “Allegiant’s first Airbus-heavy maintenance to hit in 2016 compared to expectations for 2017 previously.”