Sorry Warren Buffett, but This Airline is a Buy

Warren Buffett may not like the aviation industry but airline stocks were on a roll in 2013 and 2014. 2015, however, was not a good year for most airlines as many irrational fears pushed the stocks of major carriers downward. However, JetBlue (JBLU) managed to buck this trend as the stock was a solid performer in 2015 as well, appreciating over 40%.

Despite the strong performance, the last few weeks have been bad for JetBlue as the stock lost nearly 25% of its value. There was no such incident that justifies such a massive downfall in the stock price, and I think investors should use this pullback to buy the stock.

JetBlue has many great opportunities going forward.
One particular opportunity is the company’s potential operations in San Jose. JetBlue is expected to set up its operations in San Jose, a progressively popular airport nearby Silicon Valley, or Austin or Houston, and the company can do well in this market due to the success of its programs like Mint and Even More. JetBlue can also cover Portland, but it accounts for comparatively less significant market.

All in all, JetBlue has ample of room for expansion and the recent pullback looks unwarranted. With the demand for air travel increasing consistently, the company’s revenue will continue growing by at least 10% for the next two years. Bearing in mind the growth prospects, I think the company’s valuation is very cheap and it presents a great buying opportunity.

In addition to the growth prospects, crude oil prices are also expected to stay low, thereby boosting JetBlue’s earnings. Given the oversupply, crude oil is expected to stay near the $30 per barrel mark for quite some time and all airlines, including JetBlue, stand to benefit from it.

The outlook for crude is pretty grim right now, and if oil stays within 30% of its current levels, airlines’ earnings will stay at sky high levels. JetBlue can use the money to propel its expansion plans and can also reduce its debt in the future.

All in all, I expect JetBlue to well in 2016 in spite of the problems it faces in the West Coast, as its money-making East Coast operations accounts for a larger portion of its system. The stock has been hammered in the last few weeks, but investors should look at it as an opportunity to buy the stock for the long-run.
Published on Jan 14, 2016
By Akshansh Gandhi

Copyrighted 2020. Content published with author's permission.

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