On Friday, Goldman Sachs (NYSE:GS) resumed coverage on Allegiant Travel Company (NASDAQ:ALGT) stock, issuing a Neutral rating with a price target of $83.00. The firm provided insights into the company's future financial prospects, highlighting an anticipated significant improvement in profitability by 2025 compared to a challenging 2024.
The analysis by Goldman Sachs suggests that Allegiant is poised to see one of the largest profitability increases within their coverage universe. This outlook is based on the expectation of pilot staffing enhancements leading to greater aircraft utilization and more peak flying times.
Additionally, Allegiant's Sunseeker hotel business is predicted to be less of a financial burden in 2025, which should contribute to a forecasted operating margin expansion of 3.7 percentage points year-over-year.
Despite these optimistic projections, Goldman Sachs notes that there are considerable risks associated with executing this improvement. A key concern is that Allegiant remains the only airline in the analyst's coverage without a post-pandemic contract with its pilots. The ongoing negotiations could potentially affect pilot retention and, by extension, the anticipated improvements in aircraft utilization.
The analyst also points out that while the Sunseeker business is expected to be less of a drag on earnings, it is particularly vulnerable to local weather fluctuations and economic or competitive conditions.
Unlike the airline segment of the business, which can redirect aircraft to more profitable areas, the Sunseeker resorts do not have the same flexibility to mitigate the impact of adverse local conditions.
In other recent news, Allegiant Air's pilots, represented by the Teamsters union, have voted in favor of a strike to negotiate better compensation and work conditions. The union, which represents 1,300 pilots of the airline, announced that 97.4% of the voting pilots supported the strike action.
The pilots are advocating for pay that aligns with industry standards and improved scheduling practices. These developments are happening while Allegiant and the union are in negotiations supervised by the National Mediation Board, a federal entity.
Allegiant Air, with a market value of $1.3 billion, reported a slight dip in its third-quarter revenue to $562.2 million, down from $565.4 million in the previous year. The company's history with union agreements includes a two-year contract extension ratified last year, which covered 683 workers including maintenance technicians, store employees, and some administrative maintenance staff.
On a different note, Allegiant reported a positive operating income for Q3 2024, despite significant disruptions caused by Hurricanes Helene and Milton in Florida and North Carolina.
The company anticipates a Q4 airline operating margin of around 7%, with expectations of market recovery by Q1 2025 and cost-saving measures projected to save approximately $20 million annually. Allegiant's loyalty programs and ancillary revenue initiatives saw a 20% increase, showing the company's resilience amidst challenges.
InvestingPro Insights
Recent data from InvestingPro offers additional context to Goldman Sachs' analysis of Allegiant Travel Company. The company's market capitalization stands at $1.35 billion, reflecting its current market position. Allegiant's revenue for the last twelve months as of Q3 2024 was $2.49 billion, with a gross profit margin of 22.23%. These figures provide a snapshot of the company's financial performance.
InvestingPro Tips highlight some key points that align with Goldman Sachs' assessment. One tip notes that 6 analysts have revised their earnings upwards for the upcoming period, which supports the optimistic outlook for 2025. Additionally, the stock has shown strong returns over the last month and three months, with price total returns of 28.3% and 87.71% respectively, indicating growing investor confidence.
However, it's important to note that Allegiant operates with a significant debt burden, which could impact its financial flexibility as it works towards improving profitability. The company's short-term obligations exceed liquid assets, a factor that investors should consider in light of the anticipated improvements in operations and profitability.
For readers interested in a more comprehensive analysis, InvestingPro offers 13 additional tips for Allegiant Travel Company, providing a deeper understanding of the company's financial health and market position.
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