Wall Street powerhouse Goldman Sachs has significantly boosted its outlook on Allegiant Travel (ALGT), upgrading the low-cost airline's stock to a "buy" rating. This move comes on the heels of Allegiant's recent acquisition of Sun Country Airlines, a merger Goldman Sachs believes will fuel substantial gains for investors. The bank has set an ambitious price target of $125 for Allegiant, suggesting an impressive 30% upside from Wednesday's closing price.
The $1.5 billion cash and stock deal for Sun Country Airlines, which Allegiant finalized in January, is central to Goldman's optimistic forecast. Allegiant CEO Gregory Anderson has previously stated that integrating the two budget-friendly carriers will create a "more differentiated and durable airline," better positioned in the dynamic travel market.
Allegiant has already demonstrated robust performance this year, with its shares climbing 18.5%, significantly outpacing the S&P 500's approximately 10% rise. Goldman Analyst Catherine O'Brien is particularly bullish on the merger's potential, articulating key drivers for her upgrade.
O'Brien emphasized in a client note that "The merger drives incremental, profitable growth opportunities into an improving industry competitive environment, with a unique fuel hedge, at an attractive valuation." The combined fleet of Allegiant and Sun Country will total 195 aircraft, promising enhanced operational efficiency. Specifically, O'Brien pointed out that Allegiant's recent Boeing 737 purchases will enable Sun Country to utilize Allegiant's aircraft for its flights, thereby expanding their collective network and maximizing asset use.
The analyst also highlighted the strategic advantage gained from the recent closure of Spirit Airlines, which is expected to grant the newly expanded Allegiant more significant pricing power. "We believe that [Spirit] impacted pricing across the day in markets it served even if it only served that market 1x-daily as price-sensitive customers are more likely to be flexible on flight times," O'Brien explained, suggesting reduced competition will benefit Allegiant's margins.
Furthermore, Allegiant's unique fuel hedging strategy provides a crucial buffer against the volatile jet fuel prices, which have seen fluctuations due to Middle East conflicts. This hedge, according to O'Brien, adds another layer of stability to the airline's financial outlook. While Goldman Sachs presents a strong buy case, the broader analyst community is somewhat divided. LSEG data indicates that six out of 12 analysts covering Allegiant recommend a "buy" or "strong buy" rating, while the remaining six suggest a "hold" equivalent.
