Over the past few months, JetBlue Airways (JBLU) has hit a rough patch. The airliner was caught up in the mid-February market turbulence, and it hasn’t been able to regain much altitude since. To add insult to injury, the company’s much-anticipated Q1 earnings report failed to give the airline stock the lift it needed. This has my readers asking me: Is it time to bail on JBLU, or this a good opportunity to buy on the dip?
To answer this question, let’s first dig into the details of this morning’s earnings report. Compared with the year ago quarter, JetBlue’s net income jumped 45% to $199 million, or $0.59 per share. Analysts were looking for $0.53 EPS, so JetBlue posted an 11.3% earnings surprise. Over the same period, total revenue climbed 6% to $1.62 billion, in line with the consensus estimate.
Breaking it down, revenue passenger miles increased 14.1% over last year. At the same time, capacity also increased 14.1%, so passenger revenue per available seat mile (PRASM) declined 8.0% to $0.1135. Some investors fixated on the PRASM results, which weighed on JBLU shares.
This was clearly a knee-jerk reaction, as this was otherwise a strong report. Once the dust settles, I expect the stock to rebound. That’s because those who are selling today aren’t taking into consideration JetBlue’s strong FY 2016 guidance.
JetBlue released its outlook for consolidated operating cost per available seat mile (CASM), which is the industry’s standard metric for gauging costs. For FY 2016, the company expects the annual change in CASM to range between flat growth to 1.5% growth. Previously, JetBlue was expecting for as much as a 2.0% increase in CASM. The airliner also expects capacity to grow between 8.5% and 10.5% for FY 2016.
What this tells us is that JetBlue is doing a good job of controlling costs. And, JetBlue’s capacity growth is expected to slow, so its top- and bottom-lines are in excellent shape for the foreseeable future. The analyst community clearly agrees, as JetBlue is expected to post 6.3% annual sales and 23.2% annual earnings growth for FY 2016.
With JBLU trading at less than 8 times forecasted earnings, I consider the stock a buy on the dip. JBLU is a B-rated Buy in Portfolio Grader.