Is Allegiant Travel Co (ALGT) Too Good to Be True? A Comprehensive Analysis of a Potential ...
Value-focused investors constantly search for stocks priced below their intrinsic value. Allegiant Travel Co (NASDAQ:ALGT), with its current price of 77.6 and a fair valuation of $216.78, seems to fit this criterion. However, a deeper analysis reveals potential risks that suggest ALGT might be a potential value trap. This complexity underscores the importance of thorough due diligence in investment decision-making.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on historical multiples, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Decoding the Altman Z-score
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Snapshot: Allegiant Travel Co
Allegiant Travel Co provides travel services in the United States, selling air transportation on a stand-alone basis or bundled with air-related and third-party services and products. Customers may also purchase fixed-fee flying arrangements to receive charter service on a year-round and ad hoc basis. Additionally, customers may purchase hotel rooms, ground transportation, and other attractions to accommodate a trip.
Allegiant Travel Co's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of Allegiant Travel Co's Altman Z-score reveals Allegiant Travel Co's financial health may be weak, suggesting possible financial distress. The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Allegiant Travel Co's historical data, 2021: 0.29; 2022: 0.26; 2023: 0.27, we observe a declining trend in this ratio. This downward movement indicates Allegiant Travel Co's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
Conclusion
Despite its seemingly attractive valuation, Allegiant Travel Co (NASDAQ:ALGT) might be a potential value trap. This is primarily due to its low Altman Z-score, indicating possible financial distress. Therefore, investors should exercise caution and conduct thorough due diligence before making investment decisions.
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This article first appeared on GuruFocus.
