Why This Young Discount Airline Is Attracting Value Investors

By Gene Marcial

The airline industry has always been a tough challenge for investors to navigate, so it’s never easy for stock pickers to come up with sure-fire winners. However, there are winners to be picked, for sure, in spite of the complexity and headwinds that constantly besiege the industry.

Take the youngster in the airline business, JetBlue Airways, which started as a low-cost discount service in February 2000. It’s now fully entrenched as the fifth largest passenger carrier in the U.S. based on passenger traffic, with a large fleet of 130 Airbus A320s, 4 Airbus A321s, and 60 Embraer 150 aircraft.

“This represents the youngest and one of the most fuel-efficient fleet of any major U.S. airline,” says investment research firm Trefis. In 2013, JetBlue carried over 30 million passengers with an average of 800 daily flights, serving 82 destinations in the U.S., the Caribbean, and Latin America. JetBlue is New York based, operating mainly at the John F. Kennedy International Airport and Newark International Airport in New Jersey. Already, JetBlue commands around 40% of all airport traffic at JFK airport, according to Trefis’ analysis.

And JetBlue has been recognized as a “value airline,” based on its service, style and cost structure, notes Trefis. Known for its award-winning customer service and free TV service, as much as for its competitive fares, JetBlue believes it offers the best coach products in the markets it serves and provides reasonably priced optional upgrades.

Management remains focused on making sure the airline continues to expand and improve. “JetBlue’s management unveiled a series of value-enhancing initiatives that they intend to implement over the next few years, which we think will be accretive to the company’s bottom line and improve its ROIC (return on invested capital),” says Michael Linenberg, analyst at Deutsche Bank. “What we were so pleasantly surprised to hear, however, was that those initiatives are expected to boost annual pretax profits by $450 million, which is $100 million greater than what we originally anticipated,” he adds.

JetBlue also disclosed at its recent Analysts Day meeting its plan to grow capacity by 6%-8% in 2015. Linenberg says that given the anticipated evolution of JetBlue’s fleet, “we expect increased gauge and higher seating density to be the key contributors to its growth over the next few years.” So Linenberg raised his earnings forecast for 2015 to $1.10 from 90 cents, primarily to reflect the expected value-enhancing initiatives that JetBlue expects to roll out over the next three years.

That has prompted Linenberg to also boost his price target for JetBlue’s stock, to $17 from $13. It closed on Nov. 28 at $14.63 a share, almost matching its 52-week high of $14.94, and flying way above its year’s low of $7.61.

Although JetBlue’s shares have been big achievers this year, they are still expected to wing higher based on the stock’s continued undervaluation. Jim Corridore, equity analyst at S&P Capital IQ, has a “strong buy” on JetBlue based mainly on expectations that the airline will remain profitable through 2015 on improving demand along with higher average fare prices.

He notes that JetBlue’s stock currently trades at a deep discount to its peers “which makes the stock attractively valued at recent level.”

“We are also positive on JetBlue’s move to slow deliveries of Embraer 190s and convert A320 deliveries to A321s, which should have lower unit costs,” says Corridore. And the recent slot additions at Reagan National Airport divested by American Airlines should help reaccelerate growth, he adds.

Corridore sees JetBlue’s earnings in 2014 rising to 67 cents a share, way up from 2013’s 52 cents, and jumping in 2015 to $1.09. Soon, Corridore may have to raise his price target of $15 as the stock is almost there at Friday’s closing price of $14.63.

JetBlue seeks to differentiate itself from the rest of the pack by flying new aircraft, offering low prices leather seats and free satellite television at every seat. And it provides “reliable performance,” says Corridore.

- Source:    http://www.forbes.com