I have only flown with JetBlue Airways Corp. (JBLU, Financial) once, but it came up in a recent screen and I have been analyzing this industry piece by piece ever since Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) began accumulating stock in airlines again.
Warren Buffett (Trades, Portfolio) recently gave an interesting interview on CNBC in which he covered a couple of broad topics, namely stock valuations.
The most interesting part of the interview was Buffett's reiteration that as long as interest rates remain low, stock valuations are likely to remain high. What that means is money is likely to get even cheaper, which really means assets investors believe are overvalued will probably get even more overvalued as long as rates are low and money is cheap.
With that in mind, it is hard for me to chase high-fliers even if there is a real possibility those stocks will continue to grow. The airline industry is one that continues to trade at low price multiples. While the S&P sites at roughly 25 times earnings, the airline industry average is 15 times and JetBlue has a forward multiple of just nine times.
Long term, if JetBlue can continue its growth across sales, profit and book value, the chances are good its stock price will follow suit. Adjusted for splits, the stock is up north of 280% since 2012. In that same time, net income is up five times and book value is up over 80%.
The company trades at roughly a one to one relationship with its sales. That is a better ratio than the big three: Delta (DAL, Financial) at 0.90, United (UAL, Financial) at 0.50 and American (AAL, Financial) at 0.60. Of course, in this industry there are few, if any, competitive advantages other than the want and need for flight as a whole. Too many businesses depend on the airline industry, which actually makes it more durable.
JetBlue continues to expand its premium offering, MINT, which has helped the carrier gain share in the competitive business travel market. JetBlue estimates only 20% of its traffic is business travelers. The plan is to add additional routes to and from Las Vegas, Seattle, Boston and the Caribbean beginning in 2018 with over 80 flights daily. The company is also on track to achieve $300 million in yearly cost savings by 2020, further boosting its bottom line.
In the years to come, we will see more big storms like Harvey, Irma and Maria - storms that will ravage other parts of the coastal United States and delay travel, causing short-term bumps in profit. The reliance on air travel will only get stronger, however, making JetBlue and other well-run airlines a solid investment.
From a numbers standpoint, analysts expect $1.90 a share this year and $2.15 per share next year. Short term, all it would need is a price multiple like Southwest Airlines Co. (LUV, Financial) or Ryanair Holdings PLC (RYAAY, Financial) and the stock would be back above $30.
Disclosure: I am not long/short any stocks mentioned in this article.
