Southwest Airlines Co. (LUV) and JetBlue Airways Corporation (JBLU) are two leading air carriers in the United States. According to Statista research expert E. Mazareanu, LUV had a 16.8% domestic market share in the US airline industry, from July 2019 to June 2020, while JBLU’s market share was 5.4%.

Since the virtual collapse of the airline industry in the initial days of the pandemic, several fiscal stimulus packages and upliftment of travel ban have slightly revived air traffic. Though reaching pre-COVID levels might take a while, LUV and JBLU are definitely on the path to recovery, as reflected in their 6-month price performance. JBLU is the clear winner with 40% gains over this period versus LUV’s 18.2%. But which stock is the better buy now? Let’s find out.

Latest Movements

The airline industry has been one of the worst-performing industries during the pandemic, with a worldwide travel ban on both domestic and international fronts. From massive operating losses to unemployment and furloughs, even the biggest airlines in the country have filed for stimulus requests and tax cuts from the federal government. President Trump recently announced a $25 billion stimulus for airline payroll support, which is currently under consideration by Congress. This comes in addition to a $25 billion bailout fund plus $25 billion in low-interest loans already approved by the White House and Congress in March.

LUV won 4 awards in the 2020 Tripadvisor Travelers’ Choice awards for Airlines in July. It offered a 3-day WOW sale to incentivize traveling in August and September. LUV began servicing Chicago O’Hare Airport and Houston George Bush Intercontinental Airport in October.

JBLU is the first American airline to commit to and achieve carbon neutrality, by investing heavily in sustainable aviation fuel. JBLU has added more than 2 dozen new routes amid the market since September to account for the higher demand ahead of the holiday season. It has also announced several discount vouchers ranging from $50-$300 to boost demand.

Recent Financial Results

Both LUV and JBLU reported losses in the last reported quarter, as rising numbers of coronavirus cases have suppressed air traffic, even in the backdrop of a reviving economy. However, with various discount packages and government aids in place, these carriers are expected to recover part of their losses in the upcoming quarters, as holiday seasons are usually accompanied by higher demand.

Past and Expected Financial Performance

LUV’s total assets increased at a CAGR of 14.2% over the past three years. The consensus EPS estimate of $0.82 for 2021 indicates a 112% improvement from the year-ago value. Analysts estimate revenues to grow 73.7% year-over-year to $16.06 billion next year.

JBLU’s total assets rose at a CAGR of 13.3% over the past three years. Analysts expect JBLU’s EPS and revenue to increase by 93.6% and 83.3%, respectively, next year.

Profitability

LUV’s trailing 12-month revenue is 2.81 times what JBLU generates. However, JBLU is profitable with a gross margin of 22.4% versus LUV’s 17.8%.

Also, JBLU’s EBITDA margin of 2.2% compares favorably with LUV’s 1.7%.

Valuation

In terms of trailing 12-month price to sales, LUV is currently trading at 1.25x, 111.9% more expensive than JBLU, which is currently trading at 0.59x. LUV is also more expensive in terms of trailing 12-month EV/Sales (1.20x versus 1.01x) and Price/ cash flow and (9.40x versus 4.76x).

Thus, JBLU is a more affordable stock.

POWR Ratings

Both LUV and JBLU are rated “Neutral” in our proprietary POWR Ratings system. Here’s how the four components of overall POWR Rating are graded for LUV and JBLU:

LUV has a “C” for Trade Grade and Buy & Hold Grade, “B” for Peer Grade, and “D” for Industry Rank. It is ranked #2 out of 22 stocks in the Airlines industry.

JBLU has a “C” for Trade Grade, “B” for Peer Grade, and “D” for Buy & Hold Grade and Industry Rank. It is ranked #10 in the same industry.

The Winner

Both LUV and JBLU have taken a severe blow since the onset of the pandemic, but are slowly recovering with favorable EPS and revenue growth outlook based on a gradually reopening economy. Though LUV has a dominating market share, JBLU is the better buy here with higher profitability at a more affordable price. 

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LUV shares were trading at $39.63 per share on Friday afternoon, up $0.83 (+2.14%). Year-to-date, LUV has declined -26.30%, versus a 9.87% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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