Investment bank UBS says investors are still underestimating the financial benefits Allegiant Travel expects from its acquisition of Sun Country Airlines. The bank argues that the full earnings boost from the deal won't show up until 2027 and 2028, and that the market hasn't yet priced in the potential for the company to raise its synergy target.
When airlines merge, the big promise is "synergies" – the cost savings and revenue improvements that only materialize once the two carriers' systems, fleets, and schedules are fully integrated. These gains can take years to realize, as airlines work through complex operational hurdles. UBS believes that's exactly what's happening with Allegiant and Sun Country.
What UBS expects
UBS forecasts Allegiant's earnings per share (EPS) will climb to about $9 in 2027 and $13.36 in 2028. That's a significant jump from current levels, and the bank says roughly half of the company's $140 million synergy target is expected to hit in 2027 alone. The rest would follow in 2028 and beyond.
The bank also thinks Allegiant may raise its $140 million synergy target at its December analyst day. If that happens, it would signal that management sees even more upside from the deal than originally planned.
For context, Allegiant is a low-cost carrier known for flying leisure travelers from smaller cities to popular destinations like Las Vegas and Florida. Sun Country, based in Minnesota, operates a mix of scheduled flights, charter services, and cargo operations. The combination gives Allegiant a broader network and more flexibility, but integrating two different business models is never easy.
Why the market might be skeptical
Investors often discount merger synergies because they're hard to achieve. Airlines have a history of promising big savings from deals, only to see them delayed or reduced by operational hiccups, labor issues, or unexpected costs. That skepticism may be why Allegiant's stock hasn't fully reflected the potential UBS sees.
But UBS's analysis suggests the market is being too cautious. If the synergies do materialize as expected, the earnings growth could be substantial. The bank's 2028 EPS estimate of $13.36 would represent a major increase from where the company stands today.
What it means for investors
For everyday investors, this is a reminder that merger synergies are a promise, not a guarantee. When a company announces a deal, the stock often moves on the initial news, but the real test comes years later when the integration is complete. UBS's view suggests that Allegiant's stock could have room to run if the company delivers on its targets.
However, it's important to remember that analyst forecasts are just opinions. They can be wrong, and the airline industry is notoriously volatile. Fuel prices, economic downturns, and competition can all derail even the best-laid plans.
Investors should also watch for the December analyst day, where Allegiant may update its synergy target. If the company raises the bar, that could be a positive signal. If it lowers it, that would be a red flag.
For those interested in the broader airline sector, similar dynamics are playing out elsewhere. Rising oil prices can squeeze airline margins, while global market moves often reflect investor sentiment toward travel and consumer spending.
The bottom line
UBS's call is a bullish one for Allegiant, but it's based on a long timeline. The synergies from the Sun Country deal are expected to take years to fully materialize, and there's no guarantee they'll hit the numbers UBS projects. Investors should weigh the potential upside against the risks, and keep an eye on the December analyst day for any updates.
As always, it's wise to do your own research and consider how any single stock fits into your overall portfolio. Mergers can create value, but they also come with execution risk.
