The unfortunate buzzword for 2022: inflation. Wherever you go, it’s been hard to avoid this hot topic as inflation has soared to heights not seen in decades, with the central bank finally saying it will do whatever it takes to tame it.
The combination of high inflation, subsequent interest rate hikes and fears of a recession have also spooked markets that have been down for most of the year.
With the August inflation reports due out this week (CPI on Tuesday & CPI on Wednesday), markets will be eager to learn the results.
The good news is that the investment firm’s scouting report “shows signs of improvement,” according to Raymond James CIO Larry Adam. Why; “There is a full range of indicators that reflect an easing of inflationary pressures—even a few of the stickiest areas of inflation.”
Among them are the continued normalization of the money supply, a strong dollar that has “drastically lowered the cost of imported goods,” falling shipping costs and an improving supply chain. Not to mention, gasoline prices have fallen for 86 straight days, matching the longest falling streak since 2015.
Against this backdrop, Raymond James analysts are looking for opportunities for investors while inflation is set to ease. They have hosted two names which they project they are ready to promote.
According to the TipRanks platform, they are also rated by analyst consensus and are set to generate some nice profits in the coming months. Let’s look at what makes them attractive investment options right now.
The first stock we’ll look at is from a start-up company. V2X is the result of a merger of equals between the public entity Vectrus and the private Vertex, which took place in July. The newly formed company offers integrated mission support services and solutions for defense and national security customers worldwide, including logistics, training, facilities operations, aerospace MRO and technology services. Together, the pair has 120 years of continuous mission support and 14,000 employees.
The new combination has yet to report quarterly earnings, but we can look to Vectrus’ latest results and outlook to learn the impact the merger will have.
In the second quarter, the company generated $498 million in revenue, up 6% year-over-year and up 9% sequentially. Adjusted EBITDA was $24.7 million (5.0% margin), up $6.5 million quarter-over-quarter and up 100 basis points.
These figures, however, will become much larger in the second half of the year, when the results will affect the merger. Second half revenue is expected in the range of $1.9 billion-$1.94 billion, adjusted EBITDA in the range of $140 million-$150 million and operating cash flow between $130 million and $150 million (operating cash flow in the second quarter was $46 million).
It’s the potential of the merger that most excites Brian Gesuale of Raymond James, who believes the combination of Vectrus and Vertex “far exceeds the quality of the two businesses on a stand-alone basis.”
“We won’t buy too much into the 1+1 = 3 cliché, but it would be remiss not to point it out given the potential memory lapse of institutional investors on Vertex/L3 or Vectrus/Exelis as standalone entities,” the 5-star analyst said . to say. “V2X is broader in terms of customers and concentration, faster growing, more diversified and has a higher margin profile than Vectrus. Importantly, the shares are still trading like Vectrus’ traditional and at a huge discount to peers. As investors familiarize themselves with the new entity and as management executes, the multiple could expand by ~2x on an EV/EBITDA basis and remain a double-digit discount to most peers.”
Get on board seems to be the message from Gesuale, who rates the stock a Strong Buy, while his $50 price target leaves room for one-year gains of ~32%. (To follow Gesuale’s history, Click here)
Only two other analysts track this company’s progress, but both are also positive, giving VVX a strong buy consensus. Going from the average target of $52.33, the shares are expected to return ~38% within the 12-month time frame. (See V2X stock prediction on TipRanks)
Allegiant Travel Company (ALGT)
Let’s turn now to the airline industry, to North America’s fourteenth largest commercial airline, ultra-low-cost Allegiant.
The airline industry is currently in a recovery phase after the devastating effects of the pandemic. Although global air traffic is still around three-quarters of 2019 levels, the latest IATA data for July showed a significant rebound from 2021 levels and the improvement is expected to continue in 2023.
This is reflected in Allegiant’s preliminary passenger traffic results for July, which showed the airline flew a total of 1.94 million passengers during the month compared to 1.75 million in July 2019 before Covid. Forward traffic, or revenue passenger miles, increased 15.4% from July 2019 to 1.71 billion.
These results come on the heels of a Q2 performance in which Allegiant delivered its highest quarterly revenue ever. At $629.8 million, the number was up 28% from the 2Q19 display. Additionally, total revenue per available seat mile increased by more than 15% compared to 2Q19, although rising fuel prices and operational issues impacted results. Adj. EPS of $0.62 not only missed adj. EPS of $1 was expected by Wall Street, but also shrank significantly from the $3.46 delivered in the same period a year ago.
On another note, recently, the company has expanded into the resort business. Sunseeker Resort Charlotte Harbor, Allegiant’s first vacation rental property in Florida, is scheduled to debut in May 2023 and more than 1,100 room nights have already been booked.
With many of the earlier concerns having subsided, Raymond James analyst Savanthi Syth believes it is time to reassess this company’s outlook.
“In early January, we downgraded ALGT from Strong Buy to Market Perform due to ‘escalating risks on the horizon’, particularly idiosyncratic risks related to operations (ie, high cancellation rates), pilot cost pressure, Sunseeker capex/cost escalation and the introduction of a second type of fleet,” the analyst explained. “There are encouraging signs that operational execution has improved with cancellation rates moderating from ~7% in 1Q22 and ~4% in 2Q22 to ~1% QTD (vs. industry average of 4%/2 %/1%). In addition, Sunseeker’s capital increase has already taken place and we believe the share price better reflects the risks surrounding the second type of fleet.”
The “compelling risk reward” prompts Syth to upgrade its rating from Market Perform (i.e. Hold) to Outperform (i.e. Buy), while the $150 price target suggests shares will climb ~48% higher over the next year. (To follow the history of Syth, Click here)
And what about the rest of the way? The ratings show 6 to 4 in favor of Buys over Holds, making the consensus view a Moderate Buy. The forecast calls for one-year gains of 44% given the average price target is at $146.50. (See Allegiant stock forecast at TipRanks)
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Disclaimer: The views expressed in this article are solely those of the featured analystsmall. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.