Jet Blue: Analyst Enthusiasm Could Present Opportunity to Sell

The last two months have translated into "good times" for Jet Blue (JBLU) shareholders. The stock has more than doubled, due to a 20% retreat in the price of oil and the multitude of analyst upgrades.

The analysts might be finally coming to their senses: Lehman Brothers just raised its one year price target an exuberant 64% from $5.50 to $9.00. The analyst, Gary Chase, clarified that the stock presents substantial upside potential, as a combination of lower energy prices and a favorable capacity outlook provide the catalyst. Other Analysts chimed in: JP Morgan upgraded from under weight to neutral while S&P saw it fit, to negate the company from its negative watch list. Bear Stearns improved its outlook from under perform to peer perform. Are we out of the woods yet? Probably not, but the worst is likely behind us.

Cash burn rate is not a problem. Many pundits have been forecasting that the steep rise in fuel will cause liquidity issues, as air carriers could be forced to burn through their cash and credit lines, necessitating eventual Chapter 11 filings.

This is simply not the case with JBLU. The analysts are forecasting a 2008 loss of $100 million on revenues of $3.39 billion. These estimates marginally improve in 2009, with JBLU's top line increasing 8% to $3.67 billion but still closing out the year with a $73 million loss. If you have faith in these estimates and add back JBLU's annual non cash depreciation expense of about $184 million, you end up with more than $80 million of positive cash flow per year. If JBLU is generating this kind of positive cash flow, there is little danger of the company completely depleting its $1 billion cash war chest, unless it goes overboard on its capital expenditures, which is doubtful.

Major shareholders provide a level of confidence: There are some big names putting their money behind the carrier. They include: Deutsche Lufthansa (DLAKY.PK), owning 20% of the shares, and Fidelity Management with 10%. Manning & Napier Advisors, Thornburg Investment, Federated Investors and Wellington Management all carry 7% stakes, while Soros Fund Management, the final 13D filer, holds a 6% position.

Looking down the road: The substantial appreciation that the stock has enjoyed might provide a decent selling opportunity. The bulk of JBLU's share price action in either direction is predicated on the price of crude, and my crystal ball is currently under the weather. I have no clue where the price of oil will be next month, or for that matter, one year from now, so holding the stock can prove annoying. The shares are extremely volatile, risky and not for the faint of heart. I think the Lehman target of $9 could be too optimistic, and I would be perfectly content selling my position closer to the $7.50 mark, resulting in a nifty 25% premium to today's pricing.

Deciphering analyst motives: As you might be aware from previous pieces, I am somewhat skeptical of analyst opinions, even if they happen to share the same bullish or bearish stance that I might. The important question is, "what is the motive behind their opinion?" Are they pumping the shares to get their best clients out, or could they be bashing the shares to get their best clients the opportunity to accumulate? Are they making grandiose claims to make a name for themselves? It is certainly difficult to sift through all the noise on Wall Street, but those investors that can do so without getting emotional usually fare much better than those who can't. If you factor JBLU down to its lowest common denominator and eliminate the noise, it is simple to infer that the shares still offer more reward than risk.

Disclosure: Long JBLU.

Comments

[apppro:]

This is simply not the case, but rather the excuse of short sellers and their minions to try to destroy any recovery in a stock, and in this economy at a whole.
I am still amazed on why so many have become obsess with the US’s financial demise.

2008 Aug 31 08:00 AM