JetBlue Is The Best Airline Stock To Buy During The Coronavirus Panic
Summary
- The growing COVID-19 outbreak started to have a dramatic impact on domestic travel demand over the past week.
- Southwest Airlines recently became the latest airline to slash its revenue guidance because of a slump in bookings.
- Yet investors have punished airline stocks too harshly, particularly those with strong balance sheets like Southwest and JetBlue.
- JetBlue Airways stock is a strong buy for long-term investors at its Thursday closing price of $13.86.
In just over a week, the COVID-19 coronavirus outbreak has gone from mainly an overseas phenomenon to one that is rippling across the U.S. As of 3 p.m. EST on Thursday, there had been more than 200 confirmed cases in the country, including people evacuated from China and from the Diamond Princess cruise ship. Most of these cases have been reported since the beginning of March, including virtually all of the cases involving patients being infected in the U.S.
Not surprisingly, this has led to a sharp downturn in air travel demand, as businesses try to protect their employees and leisure travelers choose to stay home. Whereas airlines with high international exposure like United Airlines (UAL) were facing the brunt of the impact in February, domestic-focused airlines are now in the line of fire, too.
Nevertheless, investors have overreacted to the COVID-19 outbreak by dumping airline stocks wholesale. This has created some great buying opportunities for long-term investors. I continue to think that JetBlue Airways (NASDAQ:JBLU) stock is the best of the bunch. With JetBlue stock having lost about a third of its value since mid-February, this is a great time to invest in this growth company.
Data by YCharts
Airlines start to cut forecasts
In late February, United Airlines suspended its full-year forecast due to the unknown impact of coronavirus, while telling investors that it was still on track to meet its Q1 EPS guidance of $0.75-$1.25. The carrier disclosed a sharp decline in demand on routes to Asia (especially China). However, it said that increased revenue from a new credit card agreement and lower fuel prices would offset this headwind.
Over the past several days, though, the coronavirus-related demand shock has expanded to other international regions and the domestic market. On Wednesday, United and JetBlue told employees that they would implement near-term domestic capacity reductions of 10% and 5%, respectively.
On Thursday morning, Southwest Airlines (LUV) said that, while demand was in line with expectations for January and February, "in recent days, the Company has experienced a significant decline in Customer demand, as well as an increase in trip cancellations, which is assumed to be attributable to concerns relating to reported cases of COVID-19." It expects to lose $200 million to $300 million of revenue in Q1, despite the impact being mainly limited to a single month. Southwest's blanket policy of not charging change fees is exacerbating the short-term unit revenue impact, as customers can cancel flights penalty-free and receive a credit for future travel.
Southwest Airlines CEO Gary Kelly noted that fare sales wouldn't reverse the bookings slump, as price isn't the reason why people aren't traveling. As a result, Southwest's guidance now calls for revenue per available seat mile (RASM) between down 2% and up 1% this quarter. Its initial forecast called for a 3.5%-5.5% RASM gain. Even after factoring in lower fuel prices and nonfuel unit costs, this guidance update implies that Southwest Airlines' Q1 pre-tax margin will be about 2-3 percentage points lower than initially expected.
Distinguishing short-term from long-term impacts
Airlines are bracing for further COVID-19 impacts to demand in the second quarter. On the bright side, jet fuel prices have fallen by about $0.50/gallon since the beginning of 2020, and airlines will get the full benefit of that in Q2. On the other hand, they will face the full impact of the current demand slump next quarter.
U.S. airlines may need to make deep capacity cuts temporarily to match demand, and even that won't fully offset the impact of the current demand slump. Unless airlines take the radical step of furloughing employees, fixed costs will significantly reduce (or even eliminate) their earnings until demand recovers.
(United has already made sharp capacity cuts. Image source: United Airlines.)
On the other hand, U.S. airlines have significantly improved their underlying profitability and balance sheets over the past decade. All of the major airlines have the financial wherewithal to withstand even a sharp industry downturn, as long as it is temporary.
As of earlier this week, Southwest Airlines had an incredible $5.3 billion of cash on hand (equal to about 24% of its 2019 revenue), plus a $1 billion revolving credit line. JetBlue also ranks among the top airlines in terms of financial strength. It entered the year with $1.3 billion of cash and investments (equal to more than 16% of its 2019 revenue) and a pair of revolving credit facilities totaling $750 million.
Thus, there is little chance that either of these carriers will face liquidity problems because of the COVID-19 crisis. Once the outbreak gets under control, demand is likely to snap back as consumers and business travelers make up for cancelled trips. Whether that's in a few months or a year, it's very likely that investors have overreacted in the short term. Shares of JetBlue and Southwest have plunged by the equivalent of 2-3 times their annual earnings, implying that investors either expect COVID-19 to reduce long-term travel demand dramatically or they expect the current downturn to last for years.
JetBlue may be more insulated than rivals
From a long-run perspective, the massive selloff of the past few weeks likely represents a good buying opportunity for most, if not all U.S. airline stocks. That said, JetBlue appears to be the most attractive, for several reasons.
First, JetBlue's business is heavily concentrated on the East Coast. While there is now a significant cluster of COVID-19 cases in New York, the West Coast still accounts for the majority of the identified cases in the U.S. (and all domestic fatalities). Additionally, JetBlue's East Coast concentration means that it doesn't get as much traffic from travelers connecting to or from Asia flights as many of its rivals. As a result, JetBlue probably hasn't experienced as big a drop in demand as some of its peers so far.
(Image source: JetBlue Airways)
Second, JetBlue was the first U.S. airline to waive all change and cancellation fees for new bookings. This may have helped it gain some extra bookings from nervous travelers over the past week (even if some may be cancelled subsequently).
Third, JetBlue has been a little quicker than rivals (other than United) to cut excess flights. This should mitigate the RASM impact of the COVID-19 outbreak, although it certainly won't eliminate it. Depending on how long the flight cuts continue, JetBlue also may be able to finish its ongoing cabin reconfiguration project for its A320 fleet sooner than previously expected. That could provide a slight earnings boost in 2021.
The long-term story is still extremely positive
The COVID-19 outbreak will probably cause JetBlue to fall short of its 2020 EPS guidance of $2.50-$3.00. However, with JetBlue stock now trading for less than $14, investors are already bracing for a deep, long-lasting earnings decline.
The facts suggest that this is a massive overreaction. The rate of new cases is already slowing in China, barely more than two months after the first case was identified. Even if it takes longer for the outbreak to peak in the U.S., the current climate of widespread fear should begin to dissipate over the next few months, enabling a rebound in demand in time for the summer travel season. Furthermore, a vaccine may become available at some point in 2021, and better treatments for people who contract COVID-19 could be ready before then.
As a result, JetBlue still has a good chance of expanding EPS to at least $3 (and possibly as much as $4) next year, up from less than $2 in 2019, with ample growth EPS growth potential beyond 2021. That makes JetBlue stock look like a steal today.
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This article was written by
Analyst’s Disclosure: I am/we are long JBLU. 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.
I am also long Jan. 2021 $40 calls on LUV and Jan. 2022 $10 calls on JBLU.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (126)
seekingalpha.com/...With circuit breakers pulled, JBLU is leading the industry down.
PM me with how much you are putting on the table.You might start by providing actual data, not your bias, that shows that Delta is losing money in Boston, Seattle and Miami.
You won't because you can't.
2) Does JetBlue have a strong enough balance sheet to survive until air traffic rebounds? (Answer: yes)
JBLU has not beaten unhedged carriers at any time over the past five years - and fuel has gyrated up and down. It is unlikely that JBLU will gain a benefit now.And you are correct that the biggest impact is revenue related - and the market has consistently shown that discount carriers and those with low market share in their top market are hit the hardest in a downturn.
The problem is that your theory doesn't match what is actually happening in the market.
As of this hour, JBLU is off 37% from its one month highs which is more than other carriers, but less than some. Just about every day of the past week plus of airline industry selloffs, JBLU has sold off more than other airlines. The same is true today.
Investors are not accepting your theories as to why some airlines should do better.DAL and LUV have had the best performance of the US airline industry over the past two weeks which have been nothing less than a bloodletting for the airline industry.Yes, the selloff is overdone but the market sees real reasons for why it is doing what it is doing. We could debate those reasons but it doesn't change that until the market indicates a change in its choices of what carriers are most and least impacted, it does little to argue something that isn't supported by market performance.
