Comparable Companies Analysis Suggests You Should Sell Allegiant Travel Company (NASDAQ: ALGT)

in VALUATION MULTIPLES by

Allegiant Travel Company (NASDAQ: ALGT), an industrials business with a market capitalization of $2.5 billion, currently trades at an EBITDA Multiple of 8.9x which is below the sector’s median multiple of 11.6x. Although this makes ALGT look attractive, investors may change their mind after reviewing the assumptions behind the EV / EBITDA ratio. In the post below, I calculate Allegiant Travel’s fair value using an EBITDA Multiples valuation.


How To Interpret Allegiant Travel’s EBITDA Multiple

A multiples valuation, also known as a comparable companies analysis, determines the value of a subject company by benchmarking the subject’s financial performance against companies deemed to be similar. We can then determine if a company is undervalued or overvalued relative to its peers by comparing metrics like growth, profit margin, and valuation multiples.

EV / EBITDA, also known as Enterprise Value-to-EBITDA Multiple or an EBITDA Multiple, measures the dollars in Enterprise Value for each dollar of EBITDA. Its key benefit over the P/E multiple is that it’s capital structure-neutral, and, therefore, better at comparing companies with different levels of debt. The general formula behind an EBITDA Multiples valuation model is the following:

Enterprise Value = EBITDA x Selected Multiple

The EV / EBITDA ratio by itself is not very helpful at all. It is only useful when comparing it to other companies that are considered similar to the subject company. The basic idea is that companies with similar characteristics should trade at similar multiples, all other things being equal. Therefore, we can come to a conclusion about the stock if the ratios are different. In the chart below, I compare Allegiant Travel’s EV / EBITDA ratio to its peer group that includes Spirit Airlines, Inc. (NASDAQ: SAVE), Southwest Airlines Company (NYSE: LUV), Alaska Air Group, Inc. (NYSE: ALK) and Delta Air Lines, Inc. (NYSE: DAL).

ALGT EBITDA Multiple vs Peers Chartsource: finbox.io Benchmarks: EBITDA Multiples

Since Allegiant Travel’s EV / EBITDA ratio of 8.9x is higher than the median of its peers (6.3x), it means that investors are paying more than they should for each dollar of ALGT’s EBITDA. As such, our analysis shows that ALGT represents an overvalued stock. Furthermore, finbox.io’s EV / EBITDA Ratio Model calculates a fair value of roughly $112.50 per share which implies around 26.5% downside.

ALGT EV / EBITDA Valuation Calculation

I selected a fair multiple of 7.0x in my analysis by averaging Allegiant Travel’s current EV / EBITDA ratio with its peer group and sector.


EBITDA Multiple Flaws

While this approach typically provides a reasonable valuation range, it is important to understand that our conclusion rests on some important assumptions. The first being that the selected peer group actually contains companies that truly are similar to Allegiant Travel. The second important assumption is that the selected peer group stocks are being fairly valued by the market.

If the assumptions above do not hold to be true, then the difference in EV / EBITDA ratios could be due to a variety of factors. For example, if you accidentally compare Allegiant Travel with lower growth companies, then its EBITDA multiple would naturally be higher than its peers since investors reward high growth stocks with a higher price.

ALGT EBITDA Growth and Margins vs Peers Tablesource: EBITDA multiples model

Now if the second assumption does not hold true, Allegiant Travel’s higher multiple may be because firms in our peer group are being undervalued by the market.


What To Do Next

As a current investor, you may have already conducted fundamental analysis on the company and its stock so its current overvaluation could signal a potential selling opportunity to reduce your exposure to ALGT. But keep in mind the EV / EBITDA ratio’s potential flaws when applying this valuation approach. It is important to note that there are a variety of other fundamental factors that I have not taken into consideration in this article. I highly recommend that you continue your research on Allegiant Travel by taking a look at the following:

Valuation Metrics: what is Allegiant Travel’s free cash flow yield and how does it compare to its publicly traded peers? This metric measures the amount of free cash flow for each dollar of equity (market capitalization). Analyze the free cash flow yield here.

Risk Metrics: what is Allegiant Travel’s cash ratio which is used to assess a company’s short-term liquidity. View the company’s cash ratio here.

Efficiency Metrics: return on equity is used to measure the return that a firm generates on the book value of common equity. View Allegiant Travel’s return on equity here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Expertise: financial modeling, mergers & acquisitions. Andy is also a founder at finbox.io, where he’s focused on building tools that make it faster and easier for investors to do investment research. Andy’s background is in investment banking where he led the analysis on over 50 board advisory engagements involving mergers and acquisitions, fairness opinions and solvency opinions. Some of his board advisory highlights: - Sears Holdings Corp.’s $620 mm spin-off via rights offering of Sears Outlet, Hometown Stores and Sears Hardware Stores. - Cerberus Capital Management’s $3.3 bn acquisition of SUPERVALU Inc.’s New Albertsons, Inc. assets. Andy can be reached at andy@finbox.io or at +1 (516) 778-6257.

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