I recently started adding airline stocks to my portfolio. So far I only own the French/Dutch Air France – KLM (OTCPK:AFLYY) airline in my European stock portfolio but I am eager to add stocks in this interesting industry. That’s why I am going to discuss a stock I recently put on my watchlist in this article: JetBlue (JBLU)
Source: Wikipedia Commons
Macro Says Yes
In a recent article, I discussed the outlook of the US economy. One of the things that stood out was the strong performance of shipments which indicates strong sentiment among transportation companies. These tend to be a very good leading indicator of transportation stocks in general.
Shipments sentiment is currently at levels not seen since 2005 while the official ISM manufacturing index is hovering at its highest levels since the GFC recovery.
The fact that the year-on-year returns of transportation stocks seem to lag compared to the strong sentiment of shipments is the result of a mature stage in the business cycle. It is highly unlikely that transportation stocks are going to be up over 50% on average as the indicator would indicate at this point. However, this does not mean that the indicator is broken. The average transportation stock is set to gain further ground in the early months of 2018. This means that the average transportation stock is an interesting portfolio holding as I discussed in recent articles like this one about Norfolk Southern (NYSE:NSC).
RPKs Seem To Agree
The International Air Transport Association seems to agree with my bull case. Mainly because they compare the leading global composite PMI to real revenue paying kilometers which is a perfect coincident indicator to track air traffic output.
That being said we see that RPKs are growing close to 8% which is a value that is common during times of above-average economic acceleration. We are seeing it now and we saw it in 2013 and after the GFC.
Given that JetBlue is a regional player instead of a global airline it is important to dig a bit deeper. What we see in the graph below is that North America is heavily being outperformed by every single region. This of course is not the most bullish thing on earth but it is also not a warning sign. The US has by far the most mature market and emerging markets in particular tend to outperform the US in times of strong economic growth.
The US market can be seen below. It has by far the biggest market share and is even bigger than China and Europe while growth rates are only outperforming the domestic markets in Brazil and Australia.
Hurricane Irma Is Still Doing Damage To Traffic Numbers
JetBlue is one of the regional airlines that was hit hard by Irma during the hurricane season. The airline is very active in the Florida and Caribbean region, so more than 2,500 of its flights were canceled and operating income came in $30 million lower in the third quarter. Fourth quarter operating income is expected to be $50-$70 million lower due to ongoing problems in these regions.
That’s also the main reason why JetBlue is seeing a rather severe revenue passenger decline. Revenue passenger growth on a three month basis is dangerously close to 0% following the plummet of its numbers during hurricane season.
Source: Author’s Spreadsheets (Raw Data: JetBlue)
These numbers are much lower than Southwest’s (NYSE:LUV) 6.5% growth in November and Alaska Air’s (NYSE:ALK) 5.4% increase in October.
I believe that we are going to see much higher growth rates in 2018 when business goes back to normal.
A Business Model In Mint Condition
JetBlue is currently expanding a new service that is making a big difference in the airline business. The so called ‘mint service’ focuses on enhanced customer comfort in every stage of the flight from an easy check-in to early boarding, comfortable seats and free Wi-Fi to having the first bag at the carousel.
This service is only available on coast-to-coast flights from major airports and has already shown 60% Y/Y growth in the third quarter of this year. Additionally the airline is expanding on the service in Boston which should see more than 200 take-offs a day over the next few years. Fort Lauderdale will see up to 140 departures per day over the same time period.
JBLU data by YCharts
This is likely going to continue JetBlue’s growing revenue trend which did not even get a major hit during the GFC. It seems that $2 billion in sales is likely in 2018. That is going to push earnings much higher under the current cost cutting program which contains cutting ties with expensive online travel agencies and will save the company up to $300 million until 2020.
Earnings Growth Will Continue
In 2018, analysts expect earnings to surge about 7.5% to $1.89 per share. This would be a big relief after a year that saw the highest flight delay rate since 2007 due to hurricanes.
All earnings revisions were made on the upside with 5 revisions for the fourth quarter of 2017, one for the first quarter of 2018 and two for the fourth quarter of 2018.
The interesting thing is that analysts were done downgrading 2018 earnings in the fourth quarter of 2017 when analysts started to upgrade their highest eps predictions to $2.35 per share.
This puts JetBlue’s valuation at roughly 11 times next year’s earnings which is fairly cheap given its potential going into 2018.
Takeaways & One Last Graph
JetBlue is desperately trying to break out of a downtrend that started in 2015. 2016 already saw a strong uptrend which was abruptly ended during 2017’s hurricane season. At this point we are once again back at a make-or-break point.
I do not know if we are going to break out immediately. What I do know, or at least expect after doing my homework, is that we will see a breakout in the first quarter of 2018. The company is in a very favorable business environment that will improve the company’s profitability despite higher input prices like the price of crude oil. Revenue passenger numbers are set to increase again and the expansion of its successful Mint program will further enhance customer value and margins on coast-to-coast flights.
I think this stock is set to be a very strong performer in the first months of 2018 and I am likely to add this one to my existing airline play.
On a side note: please let me know your experiences with this company and its Mint program. It would be nice to see a few real-life experiences besides analyst expectations.
Thank you for reading my article. Please let me know what you think of my thesis. Your input is highly appreciated!
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in JBLU over the next 72 hours.
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.
Additional disclosure: This article serves the sole purpose of adding value to the research process. Always take care of your own risk management and asset allocation.
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