JetBlue Nosedives on Analyst Report

"Based on our analysis, JetBlue was the sole growth culprit in the fourth quarter. More bluntly, JetBlue fell on its own knife," said Baker. "Problem is, the industry is unsheathing its own capacity dagger to a greater extent than even we previously imagined, and we expect a pronounced negative impact on JetBlue's earnings both this year and next."

Indeed, Baker expects that rivals will boost capacity on JetBlue's routes by 12% in the first quarter and another 16% in the second quarter. This will put more pressure on JetBlue, which plans to increase capacity by 48% in the first quarter and 38% in the second.

On Thursday, JetBlue announced December results, which show how fast the carrier is expanding. In the month, the carrier increased capacity by 48.2%, while traffic, or revenue passenger miles, increased by 43.6%. By adding capacity faster than paying customers, the carrier filled 82.2% of its seats, down 2.7 percentage points from last year.

Also, JetBlue said it flew 35.3% more departures in December while the number of passengers flown increased by 29.6%, which could be a sign that capacity increases are weakening the carrier's overall results. But as one of the few carriers expected to post profits in the first quarter, and with some of the lowest costs in the entire industry, Wall Street is divided on the fortunes of this once-darling stock.

While Baker expects the worst, calling JetBlue his "most emphatic underweight" stock, the rest of Wall Street expects the company to show earnings growth of 26% in 2004, with an average EPS estimate of $1.06. Furthermore, analysts have begun warming to JetBlue given its recent pullback.

After JetBlue issued its warning on Dec. 4, shares fell 17.6% to close the session below $26. With shares down more than $20 from where they were just two months earlier, both Merrill Lynch and Raymond James upgraded the company, citing its attractive valuation and long-term prospects.

"While we think the concerns regarding increased competition are well-founded, we think that the 45% decline in JetBlue's share price over the past two months and concurrent drop in valuation [from] 44 times to 24 times 2004 earnings more than fully account for these concerns," said Michael Linenberg, Morgan Stanley analyst, in his Dec. 8 upgrade.

Unlike Baker, Linenberg told investors that he believed JetBlue would produce earnings growth of 20% for the next two years. Raymond James analyst James Parker said earnings would increase on a one-to-one basis with its capacity growth, which he expects to grow by 30% compounded annually over the next four years.

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