JetBlue Selling Panic Presents Opportunity

My bullish piece on JetBlue (JBLU) back near the end of May has not fared too well. Since the article, the shares have retreated an additional 25% to hit fresh multi-year lows. The culprit was most likely an additional 7% rise in crude. I was definitely "out to lunch" on this call, but not all is lost, as positive developments could be near.

Legacy Carrier decimation: JBLU's relative strength is higher than its peers. Its 25% plunge the past three months is low compared to United's (UAUA) 85% drop, American's (AMR) 50% slashing and Delta's (DAL) 48% drubbing. The entire sector is extremely oversold and at least due for some kind of "dead cat bounce".

Wall Street seems to be pricing all of the airlines except Southwest (LUV) as chapter 11 scenarios. This is too extreme and the sector's relentless selling seems to be driven by fear rather than logic. The assumption is that oil will run higher or won't see any relief until all the airlines have run out of cash. What if the price of oil drops 30% in the next three months? After such a run-up, the probability of a bubble sell-off is probably more compelling than further appreciation, yet the "Street" does not interpret it that way. Typical overreaction is "par for the course" as the herd tends to sell now and ask questions later. The Amex airline index was at $200 in 1998, and at today's price of $14, the index has shed 93% of its value. This extreme negative sentiment is a hint that we could be close to a bottom.

Replicating Southwest's model: JBLU is a low cost airline, similar to highly successful Southwest. They are trying to adopt more facets of Southwest's business model and they are getting there, slowly but surely. The company has streamlined its operations as well as sought out more valuable routes.

Cash Flow is still positive: JBLU is not burning cash yet. In fact, its first quarter results created $49 million of free cash flow when considering its $41 million depreciation charge. The company has $750 million in cash and $2.7 billion in debt which equates to about a 3.5:1 debt-to-cash ratio, which is better than the industry average.

Recent developments: The company's liquidity has improved. JBLU raised $175 million by selling convertible debentures with a conversion price set at $4.53. It's impressive that JBLU was able to raise this kind of capital in such turbulent market conditions. JBLU's June traffic also increased 2.3% to 2.3 billion passenger miles.

Short interest rising: The short interest has risen an additional 24% to 53 million shares since my last piece, representing about 25% of the shares outstanding. These added short shares represent potential buying power and could be extremely beneficial to longs if any type of "squeeze" ever went into motion.

The bottom line: I still like JBLU, however I wouldn't purchase anymore shares until the stock starts to show some consistent gains (it's better to pay more and be on the same side as the trend). I would be inclined to place a 'stop buy' order at the $4.25 mark and continue averaging up at each $0.25 price increment. JBLU's price action is almost entirely predicated on the price of crude, and if we see any significant correction in the oil bubble, the shares could easily double or triple.

Disclosure: Long JBLU.

Comments

[apppro:]

I quote from your article: "The culprit was most likely an additional 7% rise in crude." But the real reason is an orchestrated effort, not to unsimilar to the monolines and investment banks, to destroy this industry so that a few Generation Me'er's puts can be filled.

2008 Jul 14 07:35 AM

[notsosmart:]

quote"if you want to be a millionaire start out as a billioaire & invest in airline stock."nuff said.

2008 Jul 14 10:39 AM

[ejlamar:]

The world is coming to a critical juncture with oil.Continues price rises will cause widespread famine in some developing countries and will crush many industries worldwide. This situation is untenable and will have to change soon. The present situation will not continue. Most likely a strong recession mixed with increases in supply will dawn.

2008 Jul 14 01:03 PM

[User 226224:]

RECESSION WHAT RECESSION ISN T THIS A DEEP DEPRESSION AND WHEN JUST WHEN WILL OUR ELECTED OFFICIALS DO THE RIGHT THING INSTEAD OF BEING AGAINST ONE ANOTHER S IDEAS COMPROMISE TO A SOLUTION WHEN WILL BUSH LET LOOSE THE OIL RESERVES AND PRESSURE OUR ALLIES TO LOWER THE PRICE GET THE WALL STREETERS OUT OF THE WAY THATS A START

2008 Jul 14 05:16 PM

[Nicolas:]

I still share your optimism. Even with an economic depression there is a need for well managed airlines. and Jet Blue seems to fall in this category.

2008 Jul 15 10:36 AM