Forbes came out with its annual list of 200 Best Small Companies in October. Number two on the list was vacation packager and discount airline Allegiant Travel (Nasdaq: ALGT). Selling 5.75 million shares to the public at $18 a share back in December 2006, its stock jumped more than 30% on the first day of trading. Since then, it's up another 60%. I'll look at some of the reasons why this company's winning at a time when most travel-related companies are losing.
IN PICTURES: Vacation Savings Tips

  1. Catering to Small Markets
    Allegiant brings travelers from small markets to leisure destinations like Las Vegas and Orlando. Revenues come from three sources: regularly-scheduled flights, fixed-fee customers from Harrah's and ancillary revenue from the sale of hotel rooms, rental cars and other travel-related business. The company's diversified revenue model works because of its backward nature. Instead of focusing on the business traveler, which most of the competition does, it focuses on the leisure traveler, selling directly to the consumer with no intermediaries. It's different and very profitable as a result.

  2. Competition Getting Crushed
    Every business has competition. Allegiant is no different, although its small market focus tends to minimize the exposure to any one player like Southwest (NYSE:LUV), Delta (NYSE:DAL) or Jet Blue (Nasdaq:JBLU). In five of the small city airports it uses, it's the only scheduled carrier. Further, it is the only domestic scheduled carrier using Orlando Sanford International and Phoenix-Mesa Gateway Airport and one of only three at St. Petersburg-Clearwater International. I've always felt the smaller markets in America are underserved, whether its airline flights, coffee or pretty much anything else taken for granted in big cities. Allegiant's success proves this is true.

  3. Insider Commitment
    CEO Maurice J. Gallagher, Jr. is 100% committed to Allegiant's success. When it filed for bankruptcy protection in December 2000, Gallagher not only held company debt but injected additional capital into the business as part of its restructuring, becoming its majority owner and leader of a new management team. When it went public in 2006, Gallagher held 4,845,583 shares in the company. Today, he still holds 4.3 million shares or 21.3% of the company and is still its largest shareholder. Most impressively, Gallagher earns no base salary and receives relatively low bonus or stock compensation for his role as chief executive. This kind of confidence and personal investments can speak volumes for investors.

  4. Solid Profits
    Despite a difficult economic environment, Allegiant's third-quarter results were outstanding. Revenues increased 13.9% from $116.9 million to $133.1 million year-over-year, while operating income grew 170.3% from $8.1 million in last year's third quarter to $21.9 million this year. That's a 960 basis point increase in its operating margin despite a 21.9% decrease in total revenue per available seat mile. Gallagher said this about the results: "Looking forward, we are cautiously optimistic that better times are in the offing." That's bad news for the rest of the airline business.

  5. Growth at a Reasonable Price
    One of the calculations I use to screen companies is to take the trailing twelve-month price-to-earnings ratio, price-to-book, price-to-sales and PEG ratios and multiply them together. If the product is greater than 100, I toss it out. A quick check of Allegiant produces 30.1, well within my specified range. On to free cash flow we go. In the trailing twelve-months, it generated $122.7 million in free cash flow for a yield of 15.1%. In terms of its cash return on invested capital, it's an impressive 36.2%. However, it's the $11.43 in cash per share that is most interesting. Analysts estimate 2009 earnings per share will be $3.76. If you subtract the cash per share from its current stock price of $40.45, you are paying $29 for almost four dollars in earnings. That's more than reasonable in my eyes. (Learn more about financial ratios, see Analyze Investments Quickly With Ratios.)

Bottom Line
I get nervous when companies that are growing end up on the Forbes list. In this instance, however, I think Allegiant can sustain double-digit revenue growth for some time. Much like Tractor Supply (Nasdaq: TSCO), whose retail business caters to folks living in smaller towns, Allegiant serves a similar group looking for a little rest and relaxation at a reasonable price. Remember the old entrepreneurial adage: Find a need and fill it. Maurice Gallagher and company have done exactly that.

Use the to trade the stocks mentioned in this stock analysis, risk free!