Is The Market Pricing JetBlue Fairly?

by Trefis Team
+13.50%
Upside
19.40
Market
22.02
Trefis
JBLU
JetBlue Airways
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JetBlue Corporation (NASDAQ:JBLU) posted rather amazing first half results in 2017, while getting hurt on adverse weather towards the second half of the year. Despite this, the company posted an increase of almost 6% in its revenues. Additionally, the company’s stock price, through its ups and downs, eventually settled in 4% higher than at the beginning of the year. We expect a similar pricing situation to continue through 2018. The stock price, as of March 19, was $22.17, roughly in line with our estimate of $22.89.

We have created an interactive dashboard analysis to estimate JetBlue’s valuation based on its expected revenues for FY 2018. Click on the link to modify the figures to arrive at your own price estimate.

We expect total sales in FY 2018 to increase to almost $7.8 billion driven by higher air travel, expansion of ancillary revenue opportunities, and commercial partnerships. In addition, we expect the share count to be around 332 million and P/S ratio to be closer to the industry average at 0.98. Using the aforementioned figures, we arrive at a fair market price of $22.89, which is in line with where the market has priced the stock, at the moment.

Out of the expected $7.8 billion in revenues, $6.9 billion will come from the Passenger segment. Last year, despite several adverse external factors, JetBlue posted one of its most profitable years on a higher-than-expected increase in revenue passengers. The company expects this momentum to carry forward into 2018 as well. As mentioned previously, the company also hopes to increase revenues by expanding its ancillary revenue opportunities like its TrueBlue loyalty program, and by strengthening other commercial partnerships.

So how do we arrive at the $7.8 billion revenue estimate? We expect available seat miles to increase by about 7.5% as the company aims to increase capacity. JetBlue, like most of its competitors, has decided to increase its capacity in 2018. This move is likely to help the company gain more market share in untouched sectors, which, in turn, will improve the average yield. Therefore, we expect average yield and load factor to increase marginally to $0.14 and 84.70%, respectively. Using the aforementioned figures, we expect passenger revenues to increase to $6.9 billion in FY 2018.

In FY 2018, we expect Other revenue to increase to about $850 million. The primary component of Other revenue is fees from reservation changes and excess baggage charged to customers. Understandably, this does not account for much of the total sales. However, with increased passenger miles, revenues in the division are bound to increase in a similar proportion.

While at first glance it may seem as though the stock price has much room for growth, our valuation method above goes to show that the market has priced JetBlue quite fairly.

 

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