Virgin America Acquisition Makes Perfect Sense for JetBlueJBLU) has been one of my best performing recommendations of the last two years. I first recommended the stock when it was trading at around $7 and it peaked last year at over $27. Although shares of JetBlue have retracted considerably from the all-time high levels, I think the stock is undervalued at around $20, making it a decent pick.
Bad news priced in
After being bullish on JetBlue for a long time, I recently recommended investors to sell the stock and book profits. Following my recommendation, JetBlue’s shares have plunged over 10% due to concerns regarding overcapacity in the aviation industry and the increasing oil price.
However, I strongly believe investors have a tendency to exaggerate the risk of overcapacity.
Now that JetBlue has pulled back over 10%, I think investors can consider investing in the stock as the carrier has multiple tailwinds going forward.
Acquiring Virgin America
It was recently reported that Virgin America (VA) is looking for a potential suitor to buyout a massive stake in the company. According to Bloomberg, Virgin America has offers from JetBlue, and Alaska Airlines (ALK).
I think it would make more sense for JetBlue to acquire Virgin America as it could open tons of opportunity for it. JetBlue has dominated the east coast but struggles on the west coast. Buying Virgin America complements JetBlue’s business perfectly as it has strong presence on the west coast. In addition, since both the carriers have a combined market share of roughly 5%, the acquisition will not be hindered by the antitrust division.
A bid from Alaska makes sense as it wants to reduce competition on the west coast. However, JetBlue will find it easier to acquire Virgin America as both the carriers fly Airbus A320s.
Both Alaska and JetBlue will probably enter a bidding war, and if JetBlue ends up winning, it could unlock great value for shareholders. On the flipside, Alaska has a better balance sheet than JetBlue and the latter will probably have to take on more debt if it wants to takeover Virgin America.
While winning the bidding war against Alaska will prove to be a tough task, JetBlue has limited downside at current levels. If the company does acquire a stake in Virgin America, it can unlock great value for shareholders. The risk/reward ratio is favorable for JetBlue, which is why I think it is a good buy with limited downside at current levels.
Published on Mar 29, 2016By Ayush Singh