I believe there’s some value in a few airline plays at the moment, and JetBlue (NASDAQ:JBLU) is one of those names. But that doesn’t mean JBLU stock is set to soar immediately.
Unfortunately, the impacts of the novel coronavirus pandemic continue to linger. It is going to be 2021, at the absolute earliest, before JetBlue’s results start returning anywhere close to normal.
As a result, it’s likely that JBLU stock too could be stuck for the rest of the year. At the least, investors should expect some volatility.
That said, there’s still an intriguing case here. Airline stocks on the whole offer some potential value, but even in the context of the sector, JetBlue stock looks attractive.
It’s cheaper than peers when looking at pre-pandemic expectations. The balance sheet is in reasonably good shape — and certainly is stronger than those of larger U.S. airlines. And the company’s positioning limits its exposure to a key long-term risk for the industry. The bull case requires patience, but JBLU looks worth the wait.
JBLU Stock Looks Cheap
To be sure, “cheap” isn’t enough with airline stocks. Leveraged balance sheets and high fixed costs mean a small amount of revenue erosion can crush profits.
Still, even accounting for those worries, JBLU stock is awfully, well, cheap. At Tuesday’s close of $11.71, shares trade at barely 6x 2019 adjusted earnings per share. Looking at guidance from January, for EPS of $2.50-$3.00, the multiple gets closer to 4x.
Admittedly, those multiples aren’t necessarily out of line for the sector. Delta Air Lines (NYSE:DAL) stock trades at about 4x 2019 adjusted EPS. United Airlines (NASDAQ:UAL) is closer to 3x, as is American Airlines (NASDAQ:AAL).
But JBLU stock has other advantages, while its valuation is roughly the same.
A Better Balance Sheet
A notable edge for JetBlue is its reasonably leveraged balance sheet. Along with Southwest Airlines (NYSE:LUV), it has the lowest debt-equity multiple among U.S. airlines.
That’s true too when looking at interest coverage or debt-EBITDA (earnings before interest, taxes, depreciation and amortization).
The stronger balance sheet provides an advantage going forward, as JetBlue should have lower interest expense relative to operating profit than other, more leveraged plays. In other words, it can capture more earnings as the industry rebounds.
But it has been an advantage already as well. JetBlue did raise $750 million in secured debt in the second quarter. But larger rivals have had to raise literally tens of billions of dollars, as bankruptcy was a very real possibility.
Other airlines will spend years not just recouping 2020 losses, but paying down the debt needed to fund operations through this crisis. JetBlue is in much better shape on that front right now — which means it will be in much better shape going forward as well.
Consumer vs. Business Travel
The simple case for airline stocks as a whole would seem to be that normalcy will return at some point. And when it does, sector valuations presumably should return to pre-crisis levels.
Given year-to-date selloffs as high as 58%, that in turn would suggest that airline stocks can roughly double. Even if that process takes seven full years, investors still are earning an attractive annualized return of about 10%.
But there are a couple of roadblocks to that case. As noted, 2020 losses and post-2020 interest expense are an issue. The other problem is that this pandemic may well have changed long-term demand for business travel.
After all, Zoom Video Communications (NASDAQ:ZM) is one of 2020’s best stocks, with a whopping 248% return. Microsoft (NASDAQ:MSFT) is supporting videoconferencing through Teams as well. Presumably, those services will replace at least a portion of business travel going forward.
That’s a problem for the industry, given that business travel is often higher-priced and higher-margin, as it’s more likely to involve premium seating. But it’s far less of a problem for JetBlue.
The airline does offer Mint, a premium service on longer routes. But JetBlue’s overall penetration of business travel is far lower than that of larger peers.
Here, too, JetBlue looks better-positioned for a return to normalcy. JBLU stock is a play on positive travel trends — millennials, for instance, prefer experiences — without potential secular pressure from business demand.
So JBLU stock, relative to past earnings, is as cheap as peers. Yet it seems like it shouldn’t be. Investors don’t need to go flying into JBLU stock immediately. But as far as “return to normalcy” plays go, it looks like one of the better ones.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.