Is JetBlue Airways Stock Poised For Strong Gains?

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Trefis
JBLU: JetBlue Airways logo
JBLU
JetBlue Airways

The shares of JetBlue Airways (NASDAQ: JBLU) are trading 30% below pre-Covid levels despite relatively high passenger numbers at TSA checkpoints, largely due to the uncertain macroeconomic environment from high crude oil prices. However, investors have been optimistic on Allegiant Travel Company (NASDAQ: ALGT), an air carrier with a focus on under-served U.S. cities. Last year, Allegiant stock surged beyond pre-Covid levels assisted by strong broader travel demand. While both companies cater to a similar value-sensitive leisure travel customer, Trefis believes that the uptick in Allegiant indicates a growth opportunity in JetBlue Airways stock. We compare the historical trends in revenues, margins, and valuation multiple of both companies in an interactive dashboard analysis, JetBlue Airways vs. Allegiant Travel Company – parts of which are highlighted below.

1. Revenue Growth

Allegiant Travel Company’s growth was higher than JetBlue before the pandemic, with ALGT’s revenues expanding by 10% p.a. from $1.4 billion in 2016 to $1.8 billion in 2019. JetBlue’s revenues grew at an average rate of 7% p.a. from $6.6 billion in 2016 to $8.1 billion in 2019. JetBlue Airways and Allegiant Travel reported a top-line contraction of 60% and 40% in 2020, respectively.

  • Allegiant segregates its operations into three segments, Airline, Sunseeker Resort, and Other non-Airline. The company is going through a transition phase by targeting only leisure customers as compared to business and leisure customers earlier. The company is planning expansion in low competition small & medium-sized under-served markets by providing low base fares and charging extra for ancillary services. With the renewed leisure focus, the company is developing a resort in Florida along with a golf course and setting-up family entertainment centers in cities on the route network.
  • Allegiant’s Airline, Sunseeker Resort, and Other non-Airline segments contribute 99%, 0.1%, and 0.9% of total revenues, respectively. The company’s passenger revenues observed a growth of 23% from $1.37 billion in 2017 to $1.68 billion in 2019, majorly assisted by a sharp 40% surge in ancillary service revenues. Optional travel-related services such as baggage fees, advance seat assignment, insurance, etc., are referred to as ancillary services.
  • JetBlue Airways primarily earns its revenues from the sale of air tickets and other ancillary services such as freight and mail. In the past few years, continued capacity growth along with rising ticket prices have been key contributors assisting topline expansion.
  • JetBlue’s domestic business contributes a bulk of the revenues and has been the major factor strengthening investor confidence in the stock. (related: Optimism In Estee Lauder Stock A Trigger For Delta Air Lines?)
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2. Returns (Profits)

Coming to profitability, Allegiant has consistently reported better operating and net margin than Jet Blue.

  • In 2019, Allegiant reported operating and net margin of 20% and 13%, respectively. The company generated $442 million of operating cash on operating revenue of $1.8 billion. The company subsequently, invested $507 million in property, plant & equipment, returned $64 million to investors in dividends and buybacks, and raised $136 million in long-term debt (net of principal payments & issuance costs).
  • Whereas, JetBlue Airways reported operating and net income margin of 10% and 7%, respectively. The company generated $1.5 billion of operating cash on revenues of $8 billion and subsequently, invested $932 million in property, plant & equipment, and returned $542 million to investors in share repurchases.
  • Both companies have been following an almost similar capital investment plan by re-investing a sizable portion of operating cash into the business.

3. Risk

Allegiant Travel Company is a riskier bet as compared to JetBlue from the perspective of financial leverage.

  • Financial leverage coupled with strong topline growth is a boon for investors. However, interest expenses weigh on the bottom line if growth stalls.
  • In 2020, Allegiant and JetBlue reported $1.4 billion and $4.4 billion of long-term debt, respectively.
  • With $3 billion of cash & short-term investments, JetBlue has $1.4 billion of net debt.
  • Similarly, the $702 million of cash & short-term investments on Allegiant’s balance sheet results in $0.7 billion of net debt.
  • Considering the higher net debt to revenue ratio of Allegiant Travel Company, Trefis believes that it is a riskier pick over JetBlue. (related: Air Travel Demand To Push Boeing Stock Higher?)

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Feb 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
JBLU Return 0% 3% -35%
ALGT Return 0% -4% 7%
S&P 500 Return 0% -5% 102%
Trefis MS Portfolio Return 0% -9% 257%

[1] Month-to-date and year-to-date as of 2/1/2022
[2] Cumulative total returns since the end of 2016

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