JetBlue's Ride Gets Bumpy

In Morgan Stanley's eyes, JetBlue ( JBLU) may be the best growth story that the beleaguered airline industry has to offer -- it's just too expensive to buy at current levels.

A 10-week rally has tacked close to $8 onto JetBlue shares, putting the company's price-to-earnings multiple at 28 times forward 12-month consensus earnings estimates, which is more than a 50% premium to the S&P 500, according to Morgan Stanley research. Because of valuation concerns given the historical valuation of low-cost rival Southwest Airlines ( LUV), analyst William Greene cut the company's rating to equal weight from overweight.

"Over the past 25 years, Southwest has traded on average at a 20% premium to the S&P's forward multiple. With the S&P trading at 18 times forward consensus, a multiple of 22 for JetBlue would be more in line," said Greene. "Our JetBlue downgrade simply reflects a preference for a conservative approach to valuation. Translation: Investors in airlines should not get greedy."

Indeed, investors heeded Greene's advice on Thursday, taking profits and pushing JetBlue shares down $1, or 2.8%, to $34.27.

The downgrade puts a damper on the bullishness that emerged after JetBlue's first-ever shareholder meeting last Wednesday, in which the New York-based low-cost carrier told investors that the company will grow between 55% and 60% in 2003. Going forward, management said double-digit percentage growth will continue, with 30% to 40% growth in 2004 and plans to add 31 planes through the end of 2004.

In an industry in which eye-popping losses are common and earnings multiples are rare, JetBlue's performance has attracted a stampede of investors and positive comments from analysts. But while Morgan Stanley believes JetBlue could be pricey, bulls tout JetBlue's huge growth rate as a reason why the company deserves to trade at a premium to every other airline.

On Wednesday, Standard & Poor's airline analyst Jim Corridore became more bullish on JetBlue shares, upgrading them to buy from accumulate, telling investors that the carrier was best positioned to profit from government assistance and any pent-up travel demand. This follows last week's upgrade of JetBlue at UBS Warburg.

"At 31 times our 2003 EPS estimate of $1.13, and 23 times our 2004 EPS estimate of $1.53, JetBlue shares are trading at a premium," said Corridore, in his note. "However, we project a 35% EPS growth rate over the next five years. We feel this should drive superior price appreciation."

For long-term investors, Corridore's bullish stance -- and JetBlue's potential upside -- become clearer if you crunch the numbers. A 35% annual growth rate over the next five years would imply earnings of $3.94 a share by 2007. If the company continued to have a multiple that was 31 times Corridore's estimates, then JetBlue shares would hypothetically be worth $122 by then.

But in the near term, finding additional upside could be difficult, especially amid reports suggesting that airlines still have way too much capacity entering the summer and recent data on traffic showing that demand is still weak. While Morgan Stanley warned investors against "speculative selling," analyst Greene stressed that opportunities to buy JetBlue at more reasonable prices will likely come down the road.

"Airline stocks being airline stocks, we suspect that we may get a chance to get back on the story after a pullback in the shares," he wrote. "All else being equal, we would be buyers of the stock below $30 a share."

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