Jetblue Airways Corp

+0.27 (+1.42%)
4:05:05 PM EDT: $19.40 +0.08 (+0.41%)
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This Incredible Airline Stock May Rise Higher



JetBlue has earnings due out on July 28th, before the market opens. Thebiggest near-term risk is potentially falling airfares which I discuss in detail later on. But don't miss the forest for the trees, this a truly remarkable airline. The stock has outperformed Southwest Airlines (LUV), Delta (DAL), American (AAL), United (UAL), and Virgin America (VA) over the last six-months, returning over 40% while all of the other peers listed are down over that same time period. Here's a quick snapshot of those results:

The company is moving with the competitive nature of the industry by upgrading its fleet from the smaller 100-150 passenger planes to the 190-seat Airbus A321 model which have a lower unit cost. Further, the firm is rolling out its "fare families" program that unbundles amenities like one free checked bag and high speed Wi-Fi. The company has a history of innovation. It was the first airline to roll out cable (satellite) televisions for every seat. Revenue and earnings are exploding to all-time highs and every core fundamental measure is rising.

Further, if we do a scan for every Transport company greater than $1b in market cap and look for those with bullish momentum and then rank them by their fundamentals, we will find only five such companies, and JBLU has the single best fundamentals. Here are the scan results.

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While we will dive deep into the guts of this airline, at the top level we see rising revenue, earnings, operating margins and free cash flow while seeing rising capital expenditures. That's like the holy grail for an airline (or any company for that matter). But, a decline in average airfare has spoked some on Wall St. and they are calling for a revenue miss on the earnings release.

Technicals   |   Support: 18.87   |   Resistance: 21.83   

Swing Death Cross Alert: The short-term 10 day MA is now below the 50 day MA.

JBLU has a four bull (high rated) technical rating because the stock is trading above its 10-, 50-and 200- day moving averages and even though the stock is down on the day, the 10-day MA is above the 50-day MA (also called a "swing golden cross").

On Thursday, July 23rd, both Southwest Airlines (LUV) and United Airlines (UAL) reported record profits on the temporary perfect storm of lower fuel prices and full airplanes. While we had seen airfares rise (and there is a nasty DOJ investigation looking into collusion dating all the way back to 2008 for Delta, United, American and Southwest), airfares actually dropped a little in the last quarter. In a report from AP, we learned that "Government figures indicate that U.S. airfares have risen faster than inflation for five straight years, but that string might end in 2015" (Source: The Associated Press). That fare reduction isn't exactly the airlines playing nice, it's a realization of the added capacity that has been poured into the industry. I'll touch on that later in the revenue section.

Let's look at the core elements that drive the company's fundamental rating.

Fundamentals Rating Summary

Revenue (TTM US$ Millions) 5,991 5,491 5,078

Operating Margin (QTR) 1.191 1.03 1.05 RISING

Net Income (TTM US$ Millions) 534 158 112 RISING

Levered Free Cash Flow (TTM US$ Millions) 218 -116 -213 RISING

Capital Expenditures (TTM US$ Millions) 835 744 726 RISING

Stock Returns and Chart

JBLU is up +17.6% over the last three months and up +40.3% over the last six months. The stock price is up +105.9% over the last year. Note the four "bull" technical rating indicating that the stock shows near-term strength technically and may be a few steps away from a technical upside breakout.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
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Now let's examine the visualizations of the critical financial measures.

Revenue (TTM US$ Millions) 5,9915,4915,078

Revenue (TTM) is trending higher meaning that it has increased for at least five consecutive quarters (in this case twenty consecutive quarters).

Revenue over the trailing twelve months hit just under $6 billion up from $5.5 billion a year ago, or a 9% rise. The two-year change in revenue is an 18% rise. The risk to JetBlue and other airlines is the recently added new capacity by the industry in general as oil prices have fallen. In a way, the industry has destroyed its own perfect storm of lower fuel prices and higher airfares. Now fares may be dipping and competition has risen with more capacity. The American consumer, however, seems to be doing quite well, than you very much, as there appears to be no slowdown in air travel.

Let us note that while oil prices have fallen, the earnings benefit to JBLU is not only from oil prices but in fact growing revenue.

What do all these numbers mean?
JBLU's fundamental rating benefited these results:
1. The one-year change was positive (but no extra points were given for a large percentage increase).
2. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.

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Tale of the Tape

Before we jump into net income and free cash flow analysis, let's take a quick look at JBLU versus two of its peers in particular (LUV and VA). We'll examine one image but across nine distinct metrics.

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We need to take this image row by row. Across the top we can see that LUV is considerably larger than JBLU (and VA) in terms of revenue and earnings. I do note, however, that JBLU shows the largest revenue per employee ($ millions) than the peer group.

Across row two we start to see the uniqueness of JBLU, as the airline shows higher gross margins and net income margins than the other two peers.

Finally, across row three we see some fantastic results. First, JBLU is growing its revenue notably faster than LUV and VA. Second, the firm is growing earnings considerably faster. Finally, and perhaps most interesting, JBLU has a substantially lower price to sales than LUV. This hits on a specific note surrounding valuation.
Net Income (TTM US$ Millions) 534158112RISING

Let's dive back in JBLU's specifics, this time earnings (net income). Net Income over the trailing twelve months (TTM) for JBLU is rising and has broken a new all-time high to over half a billion dollars. That's a 238% rise year-over-year.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line.

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Levered Free Cash Flow (TTM US$ Millions) 218-116-213RISING

Levered Free Cash Flow (FCF) (TTM US$ Millions) is a critical determinant of stock price since market cap is the present value of all future free cash flows. It has long been noted that JBLU has not been able to turn positive FCF. That was the sort of dirty little secret surrounding the firm. But now, finally, the firm has turned that corner. For JBLU the metric is rising (it was -$116 million last year). For the most recent trailing-twelve-months the company reported Levered Free Cash Flow (TTM US$ Millions) of $218 million (positive). The cash metric is up $431 million from $-213 million two-years ago. Positive FCF, here we go. And of course, that positive FCF has resulted in a stunning stock out performance relative to peers.

Remember, fundamentals and stock prices have a relationship of causation, not correlation. The definition of a stock price is the present value of all expected future free cash flows. FCF is up for JBLU and so is the stock price.

For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time.

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Capital Expenditures (TTM US$ Millions) 835744726RISING

The last metric we'll focus on is Capital Expenditures (CapEx) (TTM US$ Millions). As we stated earlier in the introduction, JBLU is making the move to upgrade its fleet to more profitable (and larger) planes. We can see the steady increase in CapEx for the firm in the chart below. In the most recent trailing-twelve months JBLU spent $835 million, up 12% from last year's value of $744 million and up 15% from two-years ago ($726 million). That CapEx will lead (has led) to higher operating margins. The firm now generates $1.19 in revenue for every dollar in operating expense, up from $1.03 in revenue one-year ago.

In our final time series chart we plot Capital Expenditures (TTM US$ Millions).

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It's a simple question, really. Why is JBLU crushing its peers in stock price? It's also a simple answer. JBLU is innovating, investing in higher margin aircraft, growing revenue and earnings faster than its peers while maintaining higher gross margins and net income margins. The fact that it has a lower price to sales than some of its peers is even more fodder for the fire of a rising stock pric4e if earnings beat estimates, just like its peers have. JetBlue is winning. Period.