U.S. airline companies have been very successful in the last few years, and their stocks have significantly outperformed the market. Airline companies are benefiting from strong industry fundamentals, including low fuel costs, moderate capacity growth, and rising demand for air travel. However, airline stocks have fallen in the last few months along the drop in the stock market. As such, only three airline stocks among the seven airline companies that are included in Russell 1000 index have recorded a positive return (including dividend) in the last 52 weeks, as shown in the table below.
JetBlue Airways (NASDAQ:JBLU), the fifth largest passenger carrier in the U.S., has achieved the greatest return among the seven airline companies that are included in Russell 1000 index - 27.5%. Since the beginning of the year, JBLU's stock is down 5.3% while the S&P 500 Index has decreased 7.3%, and the Nasdaq Composite Index has lost 11.4%. However, since the beginning of 2012, JBLU's stock has gained an astounding 312%. In this period, the S&P 500 Index has increased 50.7%, and the Nasdaq Composite Index has risen 70.3%. Nevertheless, considering its compelling valuation and high growth prospects, the recent drop in its price creates an excellent opportunity to buy the stock at an attractive price. According to TipRanks, the average target price of top analysts is at $32, up 49.2% from its February 16 close price, which appears reasonable, in my opinion.
JBLU Daily Chart
JBLU Weekly Chart
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I find JBLU an excellent combination of superb value and a high growth stock. JetBlue has recorded substantial growth in the last few years. The company's annual average sales growth over the last five years was high at 10.2%, and the average EPS growth was extremely high at 44.6%. The average annual estimated EPS growth for the next five years is also very high at 33.92%.
On January 28, JetBlue reported fourth quarter and full year 2015 financial results, which beat EPS expectations by a significant margin of $0.05 (9.8%). Fourth-quarter revenue rose 10% to $1.59 billion from a year earlier, topping the $1.58 billion predicted by analysts. JetBlue has shown earnings per share surprise in four of its last seven quarters, as shown in the table below.
Data: Yahoo Finance
JetBlue's fourth-quarter profit doubled as the carrier spent less on jet fuel and derived better-than-expected sales gains from a new pricing system. The company's focus on U.S. and Caribbean markets protected it from the currency swings and decreased international demand that hurt bigger carriers. Price wars in some domestic markets contributed to a 3.6% drop in JetBlue's average fare per mile. The decline was more than offset by a 12% gain in passenger traffic.
In the report, Mark Powers, JetBlue's Chief Financial Officer, said:
We continue to generate healthy free cash flow and de-risk our business. Looking forward, we will continue to focus on strengthening our balance sheet and prioritizing ROIC accretive initiatives, including structural cost programs.
On February 10, JetBlue reported its traffic results for January 2016. Traffic in January increased 11.7% from January 2015, on a capacity increase of 10.8%. Load factor for January 2016 was 82.6%, an increase of 0.7 points from January 2015. JetBlue's preliminary revenue per available seat mile [RASM] for the month of January decreased approximately 3.5% year over year, which includes a positive impact of about two points from winter storm Jonas. JetBlue now expects year over year available seat mile growth in the first quarter of 2016 to be between 13% and 15%, down from prior guidance of 14% to 16% percent due to winter storms.
I see continued high growth prospects for the company. The company is benefiting from strong industry fundamentals, including low fuel costs, moderate capacity growth, and rising demand for air travel. In the fourth quarter, JetBlue had hedges in place for approximately 14% of its fuel consumption. This resulted in a realized fuel price of $1.68 per gallon, a 37.8% decrease versus fourth quarter 2014 realized fuel price of $2.70. JetBlue continues to have no hedges in place for the first and second quarters of 2016. As such, the company expects an average price per gallon of fuel, including the impact of fuel taxes, of $1.12 in the first quarter, a 33% less than in the fourth quarter. Beyond the second quarter, JetBlue has hedged about 10% of its expected second half of the year 2016 fuel consumption. Since aircraft fuel and related taxes accounted for about 24% of the company's total operating expenses in the last quarter, the anticipated saving is very significant. JetBlue is also taking steps to upgrade its aircraft, which should help lower costs in the future, and continues to benefit from its nonunion workforce. Furthermore, JetBlue's investments into its network are paying off. The company has no exposure to international markets with currency or socioeconomic issues. JetBlue's six focus cities are performing well, with growth focused on Fort Lauderdale and Boston, where it is now the largest carrier approaching 140 daily departures.
Yesterday, February 16, JetBlue issued the following statement on the same day historic air services agreement signing in Havana:
JetBlue congratulates Transportation Secretary Anthony Foxx on signing today's air services agreement in Havana and commends the Department of Transportation, Secretary John Kerry and the Department of State and the Obama Administration for their work on this important milestone. As a leading airline to the Caribbean and as an experienced carrier serving Cuba with charter flights since 2011, JetBlue eagerly awaits the opportunity to grow our service with regularly scheduled routes between various U.S. and Cuban cities. We look forward to providing the affordable, high-quality service that sets JetBlue apart. We hope the next dots on our Caribbean route map will be regularly scheduled service to and from Cuba.
In my view, JetBlue's regularly scheduled routes between various U.S. and Cuban cities, if approved, could contribute significantly to the company growth.
Regarding its valuation metrics, JBLU's stock is substantially undervalued. The current P/E ratio is very low at 10.83, and the forward P/E is even lower at 8.11. The Enterprise Value/EBITDA ratio is also very low at 4.86, and the PEG ratio is extremely low at 0.32. The PEG ratio - price/earnings-to-growth ratio - is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.
According to Portfolio123's "Momentum Value" ranking system, JBLU's stock is ranked second among all Russell 1000 stocks.
The "Momentum Value" ranking system is quite complex, and it is taking into account many factors like; Yield, price to book value, trailing P/E, price to sales, return on equity, sales growth, and relative strength, as shown in the Portfolio123's chart below.
Back-testing over sixteen years has proved that this ranking system is very useful; the reader can find the back-testing results of this ranking system in this article.
JetBlue delivered strong fourth quarter and full year 2015 financial results, which beat EPS expectations by a significant margin. I see continued high growth prospects for the company. The company is benefiting from strong industry fundamentals, including low fuel costs, moderate capacity growth, and rising demand for air travel. Regarding its valuation metrics, JBLU's stock is substantially undervalued. The Enterprise Value/EBITDA ratio is very low at 4.86, and the PEG ratio is extremely low at 0.32. In my view, the recent drop in its price creates an excellent opportunity to buy the stock at an attractive price. The average target price of top analysts is at $32, up 49.2% from its February 16 close price, which appears pretty reasonable.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.