Inefficient JetBlue Doesn’t Have a Clear Path to Profits

After falling to a low below $7, JetBlue (NASDAQ:JBLU) stock has managed to stage a mild rally, climbing currently to $11 per share.

JBLU Stock: Inefficient JetBlue Doesn't Have a Clear Path to Profits
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While the company entered the novel coronavirus pandemic with among the strongest balance sheets in the airline business, fears of a second wave of Covid-19 could weigh on JBLU profits and drive the stock price down.

Given these pros and cons, I can only rationalize maintaining JetBlue stock as a hold. This is the same opinion I held on JetBlue in an article published a few weeks ago. 

Second-Quarter Earnings Won’t Be Good

Although the second quarter is wrapping up, markets won’t receive news about JetBlue’s earnings for a few weeks if history is any indication. The company usually files earnings with the SEC about a month after quarter close. JetBlue filed its first quarter 10-Q on May 8 this year, so it won’t be surprising if investors are left in the dark regarding JetBlue’s second quarter until early August. 

The company stated that investors should expect Q2 year-over-year earnings to be down at least 90%. When investors finally can view JetBlue’s Q2 earnings expect markets to react according to that prior -90% YoY figure. That is, a beat will raise the price. 

Consider JBLU In Light of Recent Performance

Regardless of the quarterly performance, investors may be tempted by JBLU’s historically low share prices on the assumption that an increase is imminent. Market followers may also note that JBLU stock is still below IPO levels.

These two factors do make the stock seem tempting, but they also discount JetBlue’s performance over the past few years. JetBlue traded right around $20 per share from January 2016 up until the pandemic hit. And it’s right around $11 as of this writing. 

The Transportation Security Administration says June saw an average of about 500,000 daily passengers, as opposed to a 2.5 million daily average during June 2019. The point I want to make here is that JBLU shares have maintained about 50% to 60% of its value on roughly 20% of normal throughput.

Prices may approach $15 when throughput becomes normal again. An increase from $11 to $15 is strong price appreciation, but it’s likely not enough enticement for Main Street investors to take a position in JBLU given the risk. 

However, for those who picked up JetBlue below $10 per share or who had it in their portfolio pre-pandemic and couldn’t offload it, the calculus is different. The stock’s upside makes it a hold and those investors may well see some appreciation.

However, it seems naive to speculate that JBLU shares are going to rise above $20 soon, especially given some analyst expectations that airlines won’t normalize until 2022. Regardless, broad macroeconomic trends are not the only reason JBLU has trouble. 

Is a Healthy Balance Sheet Enough?

Balance sheet strength measures debt to capital. Most articles will point to JetBlue and its relative balance sheet strength within the airline industry. I do as well because it’s a valid point.

The company doesn’t have high levels of debt relative to capital. Theoretically, it should be able return profits then to investors more easily than its competition. Return on invested capital should be healthy if capital is allocated wisely. 

JBLU Stock Will Reflect the Company’s Inefficiencies

JetBlue isn’t operating very efficiently. Both gross margin and operating margin have been on the decline for several years. Perhaps certain investors could overlook this negative sign if JetBlue were showing capital appreciation in its shares.

Again though, the share price has been stagnant for the past four years. Operational inefficiency seems to be at least partially at the root of this problem. 

A further issue for JetBlue is its capital efficiency, or lack thereof. JetBlue’s weighted average cost of capital is higher than its return on invested capital. Ideally, investors want this to be the other way around. Capital should cost less than what it is returning. 

The Bottom Line on JBLU Stock

While JetBlue came into this pandemic relatively strong in terms of its balance sheet, this view somewhat narrowly misses the company’s bigger truths.

In my mind, it has been stagnant for the past few years exactly because of its weaknesses I’ve just mentioned. Yet, investors and markets seem to believe that it will come out of this pandemic scot-free.

JetBlue has a good image and its brand value may be inflating its price to a degree. But investors should place greater emphasis on fundamentals rather than presumed rebounds. 

All that said, the company will rise almost inevitably and investors who have it, should hold it. However, the company will have years working through its newly issued debt. This will naturally decelerate its path to profits.

Further, JetBlue still has operational and capital efficiency issues that existed prior to the pandemic. Its profitability was already an issue. The company will still have to figure these issues out.

Investors should consider this before charging in on assumptions of a price rebound based on things such as flight volume and brand image alone. 

At the time of this writing, Alex Sirois held no shares of any of the aforementioned stocks.

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