Airline stocks woke up on the wrong side of the bed this morning, after a JPMorgan analyst proclaimed that “patience is running thin” with the lack of sales growth in the industry. He then downgraded JetBlue (JBLU) from Overweight to Neutral, citing limited upside potential for JBLU. Separately, another analyst from Evercore ISI speculated that higher fuel prices will weigh on earnings in 2016. She then downgraded Alaska Air (ALK), also predicting limited upside potential for ALK.
Unsurprisingly, Wall Street reacted to the headlines first (without pausing to read the details), so both JBLU and ALK are declining today on the downgrades. Is this a sign of turbulence ahead for these two airliners, or is this a buying opportunity? Let’s find out, starting with JetBlue.
My Analysis of JBLU
Since 1999, JetBlue has grown to be the country’s fifth-largest airline. With over 200 aircrafts in its fleet, JetBlue operates 900 flights a day to 90 destinations. And, while being a low-cost carrier, JetBlue has also secured the top spot on several customer service rankings. For 2015, JetBlue was awarded the highest honor in customer satisfaction among low-cost carriers.
In my opinion, JetBlue has plenty of fuel left in its growth engine. And I’m not the only one who thinks so. Even with JPMorgan’s downgrade, the average analyst EPS estimate for the September quarter rose today to $0.57. Over the past 90 days, analysts have increased their earnings estimate by nearly 6%.
As it stands, analysts are calling for 10.2% annual sales growth and a whopping 137.5% earnings growth this quarter. JetBlue reports its third-quarter results on October 27, before the market opens. Looking ahead to FY 2015, the consensus estimate is for 10.2% top-line growth and 170% bottom-line growth.
All the while, the stock trades at less than 12 times forecasted earnings (below the industry average for regional airlines). I consider JBLU an A-rated Strong Buy on the dip.
Taking a Closer Look at ALK
For the past 75 years, Alaska Air Group has dominated airline routes in the Pacific Norwest. What started off as a single three-seat plane in Alaska has grown into an international carrier flying more than 17 million passengers each year. Alaska Air flies into over sixty cities across in Alaska, Hawaii, the lower 48 states, Canada and Mexico. While Alaska Air is a powerhouse on the West Coast, it has been expanding its reach eastward.
This growth is paying off. For the September quarter, analysts have also hiked up their consensus EPS estimate to $2.08. This translates to 41.5% earnings growth, on 3.5% sales growth. We won’t have to wait long for Alaska Air’s third-quarter announcement, which is scheduled for the morning of October 22. Looking ahead to FY 2015, the consensus estimate is for 52.2% earnings growth and 4.3% sales growth.
To sweeten the deal, ALK also has a solid 1.1% dividend, and the stock trades at less than 11 times forecasted earnings. ALK is also an A-rated Strong Buy.
The Bottom Line
If there’s one thing I want you to take from this, it’s that it pays to look farther than the headlines. In this daily blog I’ll continue to point out buying opportunities (and potential pitfalls), and as always my Portfolio Grader stock rating tool is free to use at any time.