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ALGT reported May traffic and updated guidance this morning. ALGT reiterated 2Q12 PRASM guidance (-5% to -7% y/y) and lowered 2Q12 CASM ex-fuel guidance by 100bp to a range of -9% to -11% y/y. These high absolute numbers must be viewed in the context of ALGT’s ~20% y/y capacity growth in the quarter driven by ‘Project 166,’ which adds 16 seats to ALGT’s 150-seat MD-80 aircraft. All revenue is not created equal: we estimate Project 166 revenue will contribute ~60% incremental EBIT margins. That, combined with likely lower fuel prices y/y should bode well for solid margin expansion for ALGT, in our view. Investors put off by negative PRASM growth would be well served to consider the source of the revenue, as well as the offsetting decline in CASM, in our opinion!
Last month we wrote a piece titled “New ways to think about jet fuel and airlines” as part of our “How should we think about?” series, where we view airlines through alternative lenses. Today we examine valuation – a subject that we’re asked about infrequently but it’s one that we think must be addressed if airlines are ever to become an investable space, particularly if that involves THHIAS (Those Historically Hesitant to Invest in Airline Stocks).
Following ODFL, we believe SAIA is currently operating best among the public LTLs with a solid mix of yield and tonnage growth. We show below that SAIA has been among the most price-disciplined LTL carriers the past few years, and this has driven more consistent OR improvement back towards past peak levels. And while the stock has materially outperformed YTD, valuation on our upwardly revised estimates is still well below the rest of the LTLs. Our $29 year-end target price assumes a 14x P/E applied to our C13 EPS estimate of $2.10, and we see room for material upside in a stronger U.S. freight economy. After ODFL operating in a league of its own the past 5 years, among the remaining LTLs, we believe SAIA seems the most likely LTL to reach new peak margins this cycle given its ability to grow, build density and expand margins off a relatively low base.
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