Here's Why This "Small Cap to Rule Them All" Pick Will Continue to Fly

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It's been just slightly more than a year since I introduced my list of 10 small-cap companies to rule them all. Allegiant Travel (NAS: ALGT) , a discount regional airline, was my fifth selection in the series, and today I thought it would be worthwhile to see how it's performed since then and what you can expect from the company going forward.
CompanyAllegiant Travel
Performance Since Pick36%
Price / Book3.18
Forward P/E11.5

Source: Yahoo! Finance.

Where it's been
Allegiant may not be consumers' favorite airline at the moment, considering that it's following in Spirit Airlines' (NAS: SAVE) footsteps and initiating a carry-on-bag fee, but there's no doubting that Allegiant continues to be the best-performing airline, hands-down (and wings up).

Allegiant's operating margins have recently been lower in light of rising fuel costs, but they remain much higher than the industry average. There are a few reasons that, even with lower operating margins, Allegiant continues to outperform.


First, Allegiant can choose which routes its wants to operate. Unlike national airlines, which can't just shut down a route that is unprofitable, Allegiant can adjust its flight patterns as it sees fit. Second, Allegiant's secondary fees (baggage, etc.) are high-margin and head almost entirely to the company's bottom line, which allows it to stick to its low teaser fares. Finally, the company's expenses are lower than those of most national carriers since it tends to purchase older aircraft. All of this translates into an industry-high net profit margin of 6.34%.

Where it's headed
There really doesn't seem to be much standing in the way of Allegiant Travel heading higher other than customer satisfaction. At a time when United Continental Holdings (NYS: UAL) and Delta Air Lines (NYS: DAL) are reducing capacity in order to curb spending, Allegiant is aggressively adding capacity and routes to grab market share.

Allegiant is also in rarefied air in that it has more cash on its balance sheet than debt. That's really an astounding feat considering that all of the national carriers have gone bankrupt at least once in the last 10 years because of burdensome debt levels. Even Wall Street's regional darling Southwest Airlines (NYS: LUV) has reverted from $160 million net cash position to a greater than $600 million net debt position over the past 12 months.

Foolish roundup
Thus far, Allegiant has been relatively successful in getting its customers to accept its "optional fees" without too much resistance, although there is a fine line between offering steep discounts and feeing your customers to death. Based on Allegiant's 36 consecutive quarterly profits, I find it likely that it will continue to outperform in the near term unless fuel prices soar through the roof. At more than three times book, I wouldn't call Allegiant an overwhelming value play, but I still see reasonable upside to the stock at these levels and am therefore keeping my CAPScall of outperform open on Allegiant.

What's your take on Allegiant Travel? Is this stock headed to cruising altitude or has it begun its descent? Share your thoughts in the comments section below.

If you like companies with a competitive advantage, you might love our analysts' Top Stock Pick for 2012. Check it out for free for a limited time only.

At the time this article was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Motley Fool newsletter services have recommended buying shares of Southwest Airlines. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that won't treat you like cargo.

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