The Bearish Case for JetBlue

NASDAQ: JBLU | JetBlue Airways Corporation News, Ratings, and Charts

JBLU – New York’s hometown Airline JetBlue’s (JBLU) stellar revenue growth in the second quarter and its plans to strengthen its presence in New York have attracted investors. However, we think the company’s continuing cost pressures and uncertain growth prospects could keep its business recovery earthbound for a while yet. So, let’s discuss.

Leading low-cost carrier  Long Island City, N.Y.-based JetBlue Airways Corporation (JBLU) offers air passenger transportation services across the United States, the Caribbean, and Latin America. As consumer confidence and travel demand return gradually from their pandemic-induced lows, JBLU’s second-quarter revenue improved significantly from the first quarter of 2021. But the company reduced its capacity by 15% in its last reported quarter.

Although improving travel demand amid widespread COVID-19 vaccinations has helped JBLU gain 46.2% over the past year, the stock is down 13.6% over the past month. In addition, the stock is trading 32.7% below its 52-week high of $21.96, which it hit on June 4. Also, JBLU is currently trading lower than its 50-day and 200-day moving averages of $17.21 and $16.91, respectively, which indicates a downtrend.

While its long-term strategic partnerships and expanded presence in New York should bode well for the stock, its continuing unit cost pressures from fuel prices and a slower-than-expected recovery could be concerning.

Here is what we think could influence JBLU’s performance in the coming months:

Strengthening Presence in New York

This month, JBLU announced plans to expand its flagship World-class Terminal 6 project at John F. Kennedy International Airport (JFK) while maintaining its head office in New York City. As the city continues to recover from the COVID-19 pandemic, this initiative should enable the company to solidify its long-term leadership position in New York and grow its presence at JFK. In addition, its plans to substantially increase flying at low fares could allow JBLU to capitalize on the uptick in travel demand.

Mixed Growth History

JBLU’s revenues have decreased at a 22.4% CAGR over the past three years. The company’s tangible book value declined at a 7.5% CAGR over this period. But its total assets have increased at a 13.2% annualized rate over the past three years.

Mixed Financials

During the second quarter, ended June 30, 2021, JBLU’s total operating revenue increased 597.7% year-over-year to $1.5 billion, due primarily to strong growth in passenger revenue. The company’s operating income came in at $147 million, compared to a $410 million operating loss in the prior-year period. But its interest income came in at negative $39 million for this quarter, compared to negative $3 million for the same period last year. Furthermore, its total operating expenses expanded 116.3% from the prior-year quarter to $1.35 billion. Its average fare declined 36.9% year-over-year to $174.47 over this period.

Poor Profitability

JBLU’s 0.2% trailing-12-month asset turnover ratio  is 69.1% lower than the 0.8% industry average. In addition, its gross profit margin, ROE, ROA, and ROTC stood at negative 14.2%, 24%, 6.6%, and 13.1%, respectively. And the company’s trailing-12-month net income margin and EBITDA margin came in at negative 28% and 43.8%, respectively.

Consensus Rating and Price Target Indicate Potential Downside

Of the 16 Wall Street analysts that have rated the stock, four rated it Buy, and 11 rated it Hold. The $14.41 consensus price target indicates a 2.5% potential decline from yesterday’s $14.78 closing price. The price targets range from a low of $8.00 to a high of $22.00.

POWR Ratings Reflect Uncertainty

JBLU has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. JBLU has a C grade for Quality. The stock’s lower-than-industry asset turnover ratio is in sync with this grade.

In terms of Stability grade, the company has a D. This justifies its relatively high 1.66 beta.

However, JBLU has a B Momentum grade, which is consistent with its price returns over the past year.

In addition to the grades we’ve highlighted, one can check out additional JBLU ratings for Growth, Sentiment, and Value here. The stock is ranked #14 of 30 stocks in the F-rated Airlines industry.

Click here to view the top-rated stocks in the Airlines industry.

Bottom Line

While JBLU’s revenue has improved dramatically in the second quarter of 2021 compared to 2020–driven by pent-up travel demand–for the third quarter it expects its  revenue to decline by 4% – 9% compared to the same period 2019. Also, analysts expect its EPS to fall at a 126.4%  rate  over the next five years. Although the company has been trying to improve its balance sheet, it will take time to rebuild its operations fully. Therefore, we think investors should wait until the company fares better financially.

JBLU shares were trading at $14.65 per share on Wednesday morning, down $0.13 (-0.88%). Year-to-date, JBLU has gained 0.76%, versus a 18.38% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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