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Bear of the Day: Allegiant Travel (ALGT)

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The airline industry has been battered by a number of headwinds this year, and with many of these contributing factors likely to continue for the time being, it is a prudent move to avoid this space—unless a particular stock offers something special. Unfortunately, that does not appear to be Allegiant Travel (ALGT - Free Report) .

Allegiant is a low-cost airline that operates a passenger airline marketed to leisure travelers in small cities. Through its subsidiary, Allegiant Air, the company operates an all-jet airline which offers both stand-alone air travel and travel bundled with hotel rooms, rental cars and other travel-related services.

In its recent earnings report, ALGT reported earnings of $3.42 per share, which surpassed the Zacks Consensus Estimate of $3.00. The marked impressive year-over-year growth, underscoring an unquestionable demand for affordable air travel. However, Allegiant’s problems start elsewhere.

The stock has underperformed its industry this year as the company has dealt with capacity-related woes, safety-related issues, high debt levels, and rising fuel costs. In fact, average fuels costs for the full year are now expected to be $2.20 per gallon, up from previous guidance of $2.17 per gallon.

Allegiant also said that capital expenditures are now projected at $300 million, higher than the earlier predicted $290 million. Meanwhile, the company is still suffering from a 60 Minutes” report from April which alleged that Allegiant’s poor safety standard was responsible for around 100 serious mechanical incidents in the Jan. 2016 – Oct. 2017 period.

All of these issues are prevalent in company’s revised earnings outlook:

This is obviously not a great earnings snapshot, as negative earnings estimates tend to be correlated with downward share price performance. What’s worse, negative revisions tend to come over time, so ALGT’s post earnings volatility could be extended in the future.

But as mentioned, the entire airline industry has faced certain headwinds this year. Allegiant is certainly not the only company to see rising fuel costs, and airlines are susceptible to PR headaches all the time. These things do not automatically disqualify a stock.

What we would be looking for here, however, is an opportunity to buy a stock at a discount compared to the industry. Here’s a look at ALGT’s recent valuation history:

Sure, ALGT is trading near its lowest earnings multiple in a year, and both its valuation and the industry’s average are a discount compared to the broader market. But we are not getting any sort of discount compared to the industry itself, so why would we pick an underperforming company with a sluggish earnings outlook?

Instead, investors would want to focus on companies with positive earnings estimate revision trends, which would be reflected in their Zacks Ranks. Right now, ALGT’s industry peers SkyWest (SKYW - Free Report) and Easyjet (EJTTF - Free Report) are sporting Zacks Ranks of #1 (Strong Buy) and #2 (Buy), respectively. These might be better options.

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