Will JetBlue Stock Recover To Its Pre-Inflation Shock Highs?

JetBlue stock (NASDAQ: JBLU) currently trades at $8 per share, more than 60% below its level in March 2021, and it seems like it is fully valued. JetBlue, one of the country’s largest airline industry players, saw its stock trading at around $8 in early June 2022, just before the Fed started increasing rates, and is currently trading around the same level. The stock has gained 22% since its low in September 2022, aligning with the S&P 500, up 22% during this period. JetBlue stock has been weighed down over the last year or so owing to concerns around its proposed acquisition of Spirit Airlines. JetBlue and Spirit agreed to merge last year in a $3.8 billion deal. However, earlier this year, the Justice Department filed a lawsuit seeking to block the proposed merger of JetBlue and Spirit, stating that it would lead to increased fares.

The 22% rise in the stock since September 2022 has been driven by a steady decline in the inflation rate in response to the Fed’s aggressive rate hike plan – although investors still have concerns about a potential recession. The notable increase in JetBlue’s revenues over recent quarters has also contributed to the stock recovery.

Returning to the pre-inflation shock level means that JBLU stock will have to gain more than 165% from here. However, we do not believe that will materialize any time soon and estimate JetBlue’s valuation to be around $8 per share, aligning with the current market price. This is because the company has higher debt levels, and its operating margin of -4.6% is still much lower than its pre-pandemic levels. With elevated fuel costs, the company may see slower earnings growth in the near term. The earnings will likely remain below its pre-pandemic figure of $1.92 (2019) in 2023 as well as 2024.

Our detailed analysis of JetBlue’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses.

In contrast, here’s how JBLU stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

JBLU and S&P 500 Performance During 2007-08 Crisis

JBLU stock declined from nearly $9 in September 2007 (pre-crisis peak) to below $4 in March 2009 (as the markets bottomed out), implying JBLU stock lost almost 60% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $5 in early 2010, rising over 40% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

JBLU Fundamentals Over Recent Years

JetBlue’s revenues fell sharply from $8.1 billion in 2019 to just $3.0 billion in 2020 as the Covid-19 outbreak hit the airline industry hard. JetBlue’s available seat miles (ASM) plunged from 63.8 million in 2019 to 32.7 million in 2020 before rebounding to 64.5 million in 2022. The company’s passenger revenue per average seat mile (PRASM) fell from 12.20 cents in 2019 to 8.36 cents in 2020 before rebounding to 13.32 cents in 2022.  Despite higher revenue, earnings decreased from $1.92 in 2019 to a loss of $1.12 per share in 2022 due to higher fuel and other operating costs. JBLU reported a $4.88 per share loss in 2020 when the pandemic severely impacted its financials.

Does JBLU Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?

JetBlue’s total debt increased from $2.3 billion in 2019 to $3.6 billion in 2022, while its total cash increased from around $1.3 billion to $1.4 billion over the same period. The company reported negative operating cash flows in 2020 of $0.7 billion. The figure was positive $0.4 billion in 2022. The high debt burden is a near-term risk that the company faces.

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe JetBlue (JBLU) stock has the potential for some gains once fears of a potential recession are allayed. That said, uncertainties around its Spirit acquisition and the pressure on the company’s balance sheet and operating margins remains a risk factor to realizing these gains.

While JBLU stock appears to be fully valued, it is helpful to see how JetBlue Airways’ Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Despite higher inflation and the Fed raising interest rates, JBLU stock has risen 25% this year. Can it drop from here? See how low JetBlue Airways stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since 2016.

[1] Month-to-date and year-to-date as of 6/22/2023
[2] Cumulative total returns since the end of 2016

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