Goldman Sachs Just Slapped A Buy On Allegiant Travel After Its Sun Country Deal

Allegiant just swallowed a competitor. Goldman Sachs likes the menu.

The bank picked up its coverage of Allegiant Travel this week with a Buy rating and a $125 price target. The pitch is short: a fresh merger of two leisure-only airlines is what a recovering travel market needs.

The Setup

Allegiant closed its purchase of Sun Country Airlines on May 13. The new, larger company now calls itself the leading low-cost, leisure-focused carrier in the country.

Allegiant's Sunseeker Resort in Florida comes along for the ride. Both airlines came in with strong profit margins but planes that flew less than they could.

Goldman thinks merging them changes that math, with one route map, one set of crews, and more seats filled on each flight. That kind of cost overlap is the whole reason most airlines combine in the first place.

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The Numbers

ALGT trades at a market value of about $2.58 billion. Its price-to-sales ratio - which is the stock price divided by yearly sales - sits at 0.67.

That means the stock is cheaper than what the airline pulls in over a year. A P/E ratio is not available because earnings have been negative, so price-to-sales is the cleaner read.

That mix is part of what made Goldman want back in right now. A cheap stock with a clear path to higher seat usage is the kind of setup analyst calls like to land on.

Insiders have not backed up the trade, though. Three insider sales added up to about $34 million over the past 12 months, with zero buys to balance them out.

The Deal Backdrop

Goldman is not a neutral voice on this one. The bank was a financial advisor on the original Allegiant-Sun Country deal and gave a fairness opinion for it, along with Barclays.

So it knows the math behind the synergy targets and the timeline for getting there. That history is worth holding in mind when reading the $125 number.

Travel demand also matters here. It has stayed firmer than a lot of analysts feared coming out of the spring.

If summer leisure flying holds up, the case for a merged Allegiant gets easier to draw. If it sags, the synergy story has to do all the work on its own.

What To Watch

The real test is whether Allegiant can turn one bigger airline into one better airline. The $125 price target points to room above the current quote, with the upside case built on filling the extra seats that come with merging two carriers.

If passengers show up, the leisure flyer just got a new market leader.

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