Shares of Allegiant Travel Company (ALGT) have had a good time on the stock markets recently, increasing by double digits in the last 90 days. The encouraging price development resulted in ALGT outperforming its industry during the said period.

Image source: Zacks Investment Research

Given the recent rally, the question naturally arises as to whether ALGT stock can maintain its bullish price trend or whether investors should book profits now. Before that, let’s dig deep to find out the reasons behind this northward price movement.

Allegiantnow expects scheduled capacity (measured in available seat miles) to increase 1.8% year-over-year in the fourth quarter. This represents an improvement over the previous expectation of 1.5%.

Total system ASM is now forecast to increase 1.9% year-over-year (previous forecast: 1.5% increase). Operating margin is now expected to increase in the range of 13% to 14%, an improvement from the previous guidance of 6% to 8%.

Earnings per share (EPS) (Airline) is expected to be in the range of $2.50 to $3.00 (previous forecast: $0.50 to $1.50). Consolidated fourth quarter earnings per share (EPS), excluding items, are expected to be between $1.75 and $2.25. This represents an improvement over the previous expectation of a breakeven of $1.00 per share. The Zacks Consensus Estimate is currently $1.06.

Apart from ALGT, Southwest Airlines Co. (LUV), American Airlines AAL and JetBlue Airways Corporation JBLU also provided encouraging guidance for the fourth quarter of 2024, supported by positive leisure travel demand.

LUV now expects fourth-quarter revenue per available seat mile (RASM, or unit revenue) to increase 5.5% to 7% year-over-year. This represents an improvement from the previous growth forecast of 3.5% to 5.5%. The upward trend was driven by improving industry demand trends and the company’s earnings management techniques paid off.

AAL raised its adjusted EPS guidance for the fourth quarter of 2024 due to the favorable pricing and revenue environment. JBLU expects fourth-quarter revenue to decline 2% to 5% year-over-year. This represents an improvement over the previous forecast of a decline of 3% to 7%. For 2024, total sales are forecast to decline in the order of 3.5-4.5% (previous forecast: decline of 4-5%).

In addition to an increase in demand for air travel, fleet expansions are another tailwind for ALGT. The company received two additional 737 MAX aircraft in November. Four MAX aircraft are expected to be in service by the end of 2024 (compared to the previous expectation of one). ALGT wants to expand its fleet size to 125 (previously 122) by the end of 2024.

The story continues

Given the encouraging numbers related to 737 deliveries, ALGT has decided to sell its underutilized CFM engines in the fourth quarter for $15 million. Given these positive numbers, ALGT expects fourth quarter CASM, excluding fuel and non-recurring costs, to decline 3.5% year-on-year.

Fuel cost per gallon is estimated at $2.50. For November 2024, the average fuel cost per gallon – system was estimated at $2.52.

With these tailwinds surrounding the stock, fourth-quarter and 2024 earnings estimates have trended over the past 90 days, as shown below.

From a valuation perspective, ALGT trades at a discount to the industry as measured by the 12-month expected price-to-sales ratio. The value is also below its average for the last five years. The company has a Value Score of A.

Image source: Zacks Investment Research

The northward trend in labor costs is hurting ALGT’s bottom line by driving up operating costs. In the first nine months of 2024, total operating costs increased 10.2% year-over-year. This was preceded by an increase of 3.6% in 2023.

ALGT’s weak liquidity position is worrying. At the end of the third quarter of 2024, the Company’s total unrestricted cash and investments were $804.6 million, significantly less than long-term debt and capital lease obligations (net of current maturities and related costs) of $1.77 billion -Dollar.

It is assumed that the ALGT share is attractively valued and the positive demand for air travel contributes to its sales. However, given the headwinds, investors should refrain from rushing into buying ALGT now.

Instead, they should closely monitor the company’s developments to find a more suitable entry point. For those who already own the stock, it is advisable to stay invested. The stock’s Zacks Rank #3 (Hold) supports our thesis. You can see You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Want the latest recommendations from Zacks Investment Research? Today you can download the 7 best stocks for the next 30 days. Click here to get this free report

Southwest Airlines Co. (LUV): Free stock analysis report

JetBlue Airways Corporation (JBLU): Free Stock Analysis Report

American Airlines Group Inc. (AAL): Free Stock Analysis Report

Allegiant Travel Company (ALGT): Free stock analysis report

To read this article on Zacks.com click here.

Zacks Investment Research