ALGT is a potential value play with strong growth prospects and strategic Amazon backing, but carries risks from high input costs and integration challenges; speaker is monitoring for entry.

Well, this most recent quarter, it actually showed that Amazon added a brand new holding to their portfolio, which surprisingly was actually a not so well-known airline called Allegent Travel Company. ticker symbol ALGT,

which if we look at that filing from Amazon, it was revealed that they now own close to $150,000 shares as a brand new pickup last quarter and is currently valued at over $17.5 million.

And something that's uh kind of interesting too is that based on the estimated share price of that holding that that Amazon paid, well, Amazon would actually be down on their position by over 20% right now because uh the stock has actually performed very poorly.

So what the heck is going on here with this holding? Why and how did Amazon end up with these shares? What's the partnership going on behind the scenes with actually Prime Error, which could be a gigantic deal for the future of this company?

And is this a stock that is worth investing in ourselves to follow in Amazon's footsteps because of that super um valuable backing from a tech giant like Amazon and even with the beaten down stock price too that they're currently negative on.

Could there be some value here for shareholders or is this something that is uh just too risky um to be holding in your own portfolio? Are there any things that we should be cautious about with this stock?

Okay, so the the very first thing that I think you should know about this uh new position here in Amazon's portfolio is that it's actually not as new as that 13F filing might have you first believe.

Now, let me explain here. It really has everything to do with a giant acquisition that just recently closed where earlier this year Allegiance announced that they were buying a rival budget airline called Sunount Airlines in a huge $1.5 billion acquisition deal.

However, Sunountry also has another giant revenue engine that Allegant wanted to get their hands on as Sun actually operates a highly priced and lucrative cargo fleet consisting of even 20 Boeing 737 freighter jets that are provided by none other than Amazon who also happens to be their largest customer for that entire logistics network through Amazon Prime Air.

But anyway, because of this cargo contract with Sun, well, Amazon originally held equity warrants, too. And so when Allegian finally closed the deal this year through a combination of both cash and stock, well, it triggered a mandatory share conversion for Amazon, giving them now this large position in Allegiance.

So with all of this background in mind, where do we go from here? How's the business for Allegiance? What's the stock price looking like here? And is this something that we should consider owning ourselves down now, too?

Well, on the pros side of things, Allegent already had a pretty good business model to begin with, uh, operating as almost like a ultra low cost carrier that typically offers much cheaper flights by sticking strictly to a low utilization business model where unlike larger legacy airlines that, you know, fly their planes around the clock, while Legion focuses mostly on scheduling their flights during times of peak leisure demand where, for example, on low days of of the week, they'll literally just park their planes and reduce capacity in order to save on costs.

Basically refusing to fly any routes that would cause a loss for them, which other airlines, you know, sometimes do do anyway. Uh because through this new acquisition, well, Allegiance is no longer just a budget passenger airline anymore.

This is now a much larger, more diversified name in aviation with direct backing from Amazon as a strategic partner, too.

Now, last quarter, for example, the newly combined company reported industry-leading operating margins north of 9%. Their consolidated revenue per available seat soared by nearly 25% to break all-time highs.

To me, this proves that they do actually hold some nice pricing power in the market and they can maximize uh revenue on every single passenger that they fly and strategically the ones that they choose to fly on the on their uh you know kind of more restricted capacities that they tend to run.

Now, meanwhile, the Sunountry side of of the business brought in a record $65.7 million in fixed fee revenue with over 50 million of it coming from cargo sales alone.

So going forward, I actually think you know the Amazon contract will act as a pretty good kind of buffer almost like a shock absorber that can provide some guaranteed cash flows to Allegiance helping them cover the cost when you know passenger demand can fluctuate which we know happens a lot in um you know in the uh the aviation industry and the the travel market and and that I feel just kind of does add a bit of safety um to this company and the stock that maybe they didn't previously have.

Plus, that new acquisition is expected to generate huge synergies on both the top and bottom line, which is why analysts project now surging growth in sales and EPS of around 20 to 80% annually in the coming years.

They also recently signed a new partnership with Expedia that's already bringing new customers who' previously never flown with Allegent. They're launching a new premium cabin class called Alleion First that will help uh help this company grow a bit further beyond just you know like budget ticket sales.

And yet because of a giant downturn coming off the pandemic, well the stock valuation uh just happens to be dirt cheap too being down now about 70% from its all-time highs and even trading pretty close to the 2020 pandemic lows which is kind of crazy.

And so when you couple that crash with the now surging financials, this new growth that they're going to be experiencing, including all the synergies from the acquisition, well, their PE and PEG ratios are now sitting at some crazy low levels.

Like when I looked at their forward PE ratio, well, it's now trading over 30% cheaper than the sector, over 70% lower than their own 5-year average, and then their PEG ratio is somehow around 80% lower than the sector 2.

Now, I'm not sure how reliable that PEG is cuz, you know, sometimes all the dramatic synergies that you get from a giant merger like this can temporarily distort PEG formulas. So, it can be a little tricky depending on how analysts are actually calculating this.

Um, but when you look at those analyst projections, I mean, even the most bearish ones still think that the stock is going to rise, you know, much higher in the coming year, too.

Now, having said all of this, as good as all of this sounds, um, I still don't think that you should just kind of run out and blindly pour money into this stock just cuz Amazon is buying it.

Now, for one, jet fuel tends to be a margin killer for airlines. And right now those costs have been rising greatly which is something that is completely out of management's control especially with all the war and conflict in the Middle East and and even with just kind of the general state of the economy with with all the the high interest rates rising inflation.

And these are things that again are out of management's control, can really weigh macroeconomically on them a and it can again it can really affect their their not only travel demand because obviously people are are not going to be traveling as much if times are tough.

Uh, in fact, Allegent has even said already that they're actually going to be cutting capacity um just because of those jet fuel um rising costs. So, they'll be limiting capacity to kind of try to blunt some some of that some of the impact from that.

Now, second um their new Sun Country network has been facing some labor issues as larger fullervice airlines have aggressively poached some of their entry-level crews.

but even Allegiance has had to implement some new collective bargaining agreements that include long overdue bonuses totaling hundreds of millions of dollars, which can add some heavy near-term pressure to their labor costs.

And I think that has been weighing on the stock a little bit too.

Now, third, merging two airlines is not known for being an easy transition to pull off. You tend to have some issues with that. and I wouldn't be surprised if some of those great synergies that they've been promising so much um end up being a bit more volatile than anticipated maybe even a bit weaker and then that's something that you know if they end up disappointing on some of their results going forward some of the things that they promised on.

I wouldn't be surprised at all if analysts start kind of cutting down those high price targets that they currently have on it and then maybe that weighs on the stock too.

In fact, because of the heavy integration costs and their aggressive investments into new aircraft, uh well, their free cash flow is projected to be deeply negative both this year and the next, burning through many hundreds of millions of dollars before an eventual recovery is expected.

And I I feel that that is probably another reason why, you know, the stock is so cheap on an earnings basis, but when you look at the free cash flow, it is being weighed down heavily because of all of these costs going on, right?

Now, overall though, I think there is still a lot to like here. And um while it's not a stock that I own yet myself, I will be keeping a very close eye on it and considering dipping my toes in at some point, especially if I can get, you know, some more research done on on this company.

So far, I like everything I see. I would like to do a little more research, but you know, even just for the the the the little research that I've already gotten done on it. Um, it's looking like it could be a decent fit for I would say like the right investor that is actually, you know, specifically looking for some of that airline exposure.

But hey, if you want the more kind of sleeper alternative play with also that very enticing partnership and and backing of Amazon, which I think is a gigantic deal, I mean, we all know that Amazon is probably going to like end up dominating the world in the future, right?

So, you know, having them tied to Allegent, yeah, Allegant might be a good choice here, might be an even better fit for you if that's something that you want.

Let me know down below what you all think about this one in the comments. Do you like this stock? This is the first time I've ever covered this stock. Would you buy it for that exposure to Amazon's growing logistics network or do you prefer a traditional kind of premium airline play, something like Delta?