It’s been a rough few months for shares of JetBlue (NASDAQ:JBLU). The novel coronavirus pandemic — formally dubbed Covid-19 — sent unprecedented shock-waves across the global air travel industry. As it did, JBLU stock sunk from $20 to below $10.
Signs of hope emerged in late May. The U.S. economy began to reopen. Consumer behavior began to normalize. Air traffic trends began to improve. JBLU stock flew to levels above $15.
Then, Wall Street freaked out about the potential of a “second wave” of Covid-19 amid rising case numbers and hospitalizations in certain states. In June, Jet Blue stock has sunk back to around $10.
This is a good time to buy the dip in JBLU stock.
The reality is that, while a second wave is coming, it won’t derail the economic recovery, or the airline industry’s rebound. To that end, it won’t depress JBLU stock for long, and over the next 12 months, this stock will fly back to $15.
Here’s a deeper look at why.
A Permanent and Lasting Rebound
The U.S. economic recovery — and by extension, the airline sector’s recovery — that has materialized over the past few weeks is permanent and lasting.
As it turns out, U.S. consumers like doing things. They don’t like sitting in their homes all day, watching Netflix (NASDAQ:NFLX) show after Netflix show, playing Activision (NASDAQ:ATVI) game after Activision game. So, throughout February, March, April and May, U.S. consumers got cabin fever. They got an itch to go do things, and became sick and tired of living in fear of a virus that the newest science showed was only slightly more lethal than the seasonal flu.
So, when things started opening up again, consumers started doing things again. They started going to malls again. They started going to beaches and restaurants again. A lot of them went to protests, which were essentially the paragon of the social gatherings which the CDC has been telling people to avoid for the past few months.
Yes, there has been a spike in cases and hospitalizations in certain states because of these activities. But not a significant spike. We are talking 250,000 new cases in June, and about 10,000 new deaths, against the backdrop of tens of millions of Americans who have increased their mobility. Thus, the overwhelming majority of these consumers who are going to malls, beaches and restaurants again, are not contracting Covid-19, let alone being hospitalized or dying because of the virus.
So long as that remains true — and the current science suggests it will remain true — I doubt consumers will get scared back inside again. The recovery will live on. It will survive a second wave. All of the current rising economic trends will persist.
One of those trends is air traffic. From its mid-April lows to today, TSA recorded total traveler throughput at airports has risen more than 500%. Sure, total traveler throughput is still down 79% year-over-year as of mid-June. But that’s up from 90%+ declines throughout April and May, and represents the first time that the year-over-year decline has been less than 80% since March 21.
The emergence of a second wave won’t derail this recovery. Between now and the end of the year, air traffic trends will significantly improve as consumers and enterprises increasingly mobilize. As that happens, JBLU stock will fly higher.
JetBlue Stock is Undervalued
JetBlue stock is undervalued, assuming that domestic air traffic largely normalizes by 2022, which it should, given that a Covid-19 vaccine is likely in 2021.
As a low-cost, mostly domestic airline operator (roughly 70% of 2019 revenues were domestic), JetBlue is well positioned to recover more quickly than its peers. That’s because traffic volumes on cross-Atlantic and cross-Pacific flights will likely take longer to recover than traffic volumes on domestic flights. Also, it’s because low-cost flight traffic volumes will likely recover more quickly than premium flight traffic volumes.
As such, if global air traffic largely normalizes by 2022, then JetBlue’s traffic should be entirely normal by 2022. In other words, JetBlue’s 2022 revenues should be exactly where they were in 2019 (around $8 billion).
Assuming so — and further assuming that pre-tax profit margins rebound to 7.5%, below their ~10% 2019 levels due to higher cleaning costs — then my modeling suggests that JetBlue can do about $1.70 in earnings per share by 2022.
Based on a historically average 9-times forward earnings multiple, that equates to a 2021 price target for JBLU stock of $15.
Bottom Line on JBLU Stock
The airline sector recovery is underway, and it won’t be derailed by a second wave of Covid-19. As such, I’d be a buyer of JBLU stock on any second-wave-inspired dips in June.
The company will ultimately shake off these second wave fears, and JBLU stock will reclaim the $15 soon.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long NFLX.