Is Jet Blue's Descent Into Penny Stock Territory an Opportunity?

Key Points

• JetBlue is moving forward with its pending $3.8 billion acquisition of Spirit Airlines and plans to close the deal by the first half of 2024.
• Lower-than-anticipated 2023 profits, the lack of a dividend, and long-term debt at 56% of the capital structure are all weighing on the stock. 
• Wall Street remains cautious with all five ratings since the Q2 report being ‘holds.’

JetBlue Airways Corporation NASDAQ: JBLU stock is selling for peanuts.

On Friday, shares of the low-fare airline fell to their lowest level since 2012. Trading below $5.00, Jet’s Blue’s second trip to penny stock land has been accompanied by plenty of turbulence.

Like its peers, JetBlue quickly became a popular ‘reopening play’ from the depths of the market’s pandemic lows. From March 2020 to April 2021, the stock soared as much as 232% — but the landing gear has been activated ever since.

The biggest dark cloud that’s been hanging over Jet Blue is its pending $3.8 billion acquisition of Spirit Airlines. While the combination would create the fifth largest U.S. airline, it has come with plenty of regulatory scrutiny and investor skepticism. Despite a Department of Justice (DOJ) lawsuit that alleges consumers will face higher fares, JetBlue is moving forward and plans to close the deal by the first half of 2024 — nearly two years after it was announced. 

Earlier this month, the JFK-based airline struck a separate agreement with Allegiant Airlines to divest Spirit Airlines assets at Boston Logan, Newark Liberty International and Fort Lauderdale-Hollywood airports. Although the move was made under the guise of promoting “ultra-low-cost carrier growth,” putting regulators in better ‘spirits’ was the real reason. Whether this changes the DOJ’s position remains to be seen.

On September 29th, JetBlue will make a $0.10 per share monthly “prepayment” to Spirit shareholders as it has since January 2023 in accordance with the merger agreement. For investors, the slow bleed of what will amount to a $272 million total prepayment has been painful to watch, especially considering Jet Blue’s heavy debt cargo. Management’s bleak outlook for the rest of the year hasn’t helped matters.

How Are JetBlue’s Fundamentals?

JetBlue’s most recent quarterly results — 7% revenue growth and, thanks to lower fuel costs, a return to positive earnings — slightly exceeded the market’s expectations. This was overshadowed by management’s lowered full-year guidance due to softer demand for domestic air travel. With fuel costs also ticking higher, it now expects 2023 earnings per share (EPS) of $0.05 to $0.40, well below the prior forecast of $0.70 to $1.00. 

Overall, the air travel industry is benefiting from strong leisure travel demand. What’s catching some airlines off guard, though is stronger-than-expected demand for international flights. JetBlue’s U.S. focus is forcing it to fly standby. In an attempt to get on board, the company has been rolling out new routes to Amsterdam and other popular overseas destinations. 

Besides the lower-than-anticipated 2023 profits, JetBlue’s leverage is weighing on the stock. It exited Q2 with $3.7 billion in adjusted debt, more than twice its cash position. With long-term debt now 56% of the capital structure and no dividend in sight, fundamental investors have been hesitant to board despite the stock’s low ticket price. But has it become too low?

Is JetBlue Stock Undervalued?

At the midpoint of management’s revised EPS guidance, JBLU has a 2023 P/E ratio of 20x. Based on the consensus forecast for 2024, the P/E ratio is 15x. Neither are inexpensive relative to the big four airlines — some of which are trading at 2023 and 2024 multiples below 5x. Even though JBLU looks cheap at $4.52 per share, in terms of the level of earnings investors can expect, it’s far from undervalued.

Of course, the wild card here is the pending approval of the Spirit merger. If regulators give the deal the green light, sentiment around JBLU could change dramatically — even if the near-term earnings outlook does not.

Over time, an approved JetBlue-Spirit merger would significantly expand JetBlue’s domestic footprint. And as leisure and business travel volumes return to pre-Covid levels and beyond, the airline could become a major beneficiary of a domestic travel boom — especially if inflation and rate pressures subside. If merger synergies fall into place, accelerating revenue could coincide with rising profitability.

Until this happens though, investors may be better off taking a flier on JBLU. Although the stock got its first upgrade in over a year last month (Evercore ISI upgraded from Underperform to In Line), Wall Street remains cautious. All five ratings since the Q2 report have been ‘holds.’ 

Whether the Spirit deal goes through or not, JetBlue may perform better in 2024. But until the fundamentals show progress, this penny stock may be headed due south to a new all-time low.