JetBlue Analysts Say ‘Bring Us the Head of Dave Barger’

NEW YORK (TheStreet) -- Wall Street has a mean streak, one that is now on display as increasing numbers of airline analysts call for the head of JetBlue (JBLU) CEO Dave Barger.

In fact, JetBlue shares have traded higher in recent months based on the premise that Barger will soon depart, enabling the carrier to adopt more profit-oriented, consumer-unfriendly measures such as offering less legroom and charging for a first bag.

                                                                     

Shortly after the opening bell on Wednesday, JetBlue shares traded up 17 cents at $12.50. Shares are up 44% year-to-date.

Barger is seen as a symbol of an airline that has tried to be different, offering premium service at coach prices, and that consequently has come up short in the profit department. He has been with JetBlue since 1998, two years before the first flight, and became CEO in 2007.

The widespread assumption is that JetBlue President Robin Hayes will replace Barger in February, but Wall Street's preference appears to be for Barger to depart more quickly.

In the past two weeks, at least four analysts have issued reports encouraging a change in JetBlue's approach, accompanied by Barger's departure.

Cowen and Co. analyst Helane Becker on Wednesday upgraded JetBlue to outperform from market perform and raised her target price to $15 from $10. "Our upgrade hinges on JetBlue re-working its model to increase profitability," Becker wrote. "This may include a management change. ... We believe JetBlue could make a management change at the top in order to foster a change in strategy throughout the company.

"Given the company's long history of underperformance in margins and in ROIC, we believe a management change is almost inevitable," she said.

 A first bag fee would add 26 cents to annual earnings per share, Becker concluded. Charging for Wi-Fi, now free, would add 9 cents. And adding 12 seats to each A320 -- cutting back on legroom in coach -- would add 18 cents. That "might hurt JetBlue in the media (but) the revenue benefit to the company would probably trump any customer push back," she wrote.

 

What is the problem with JetBlue? "It is an overly brand-conscious and customer focused-airline," Becker wrote. This essentially summarizes Wall Street's view of Barger.

"JetBlue is in a nice position where it can do no wrong," DeNardi wrote. "Bad news is good news because they will be more likely to pursue a more shareholder friendly business strategy." He noted that JetBlue shares have risen from $7.63 in late April to roughly $12 "at a time when airline stocks have generally underperformed."

A week ago, on Aug. 13, Wolfe Research analyst Hunter Keay noted that JetBlue's July passenger revenue per available seat mile gain of 1% was below guidance of 2% to 3%. He also wrote that the carrier is unlikely to achieve its 2014 target of 7% return on invested capital.

"JBLU's board understands that failure to achieve adequate returns is a direct threat to business life as they know it," Keay wrote. "Failure to achieve adequate returns as others thrive is entirely unsustainable. Bad PRASM will enable change. We continue to believe that JBLU will have a new CEO by November."

Keay was the first analyst to articulate the "bad news is good news" concept in regard to JetBlue and to upgrade shares as a result. He has an outperform rating and a $15 price target on the stock.

In July, Keay drew an analogy between JetBlue and Alaska (ALK) because both are being challenged in their hubs by Delta (DAL) , which has been growing in New York and Seattle. "The two domestic-oriented airlines that demonstrably underperformed on June passenger revenue per available seat mile are both under attack by Delta," Keay wrote.

"Delta's competitive incursions last year prompted Alaska to move aggressively on commercial initiatives prior to Alaska's stock doubling," he wrote. "We think Delta's incursions in JetBlue's markets could prompt a similar response, and JetBlue has more low hanging fruit to pull, in our view."

Two weeks ago, on Aug. 6, Imperial Capital analyst Bob McAdoo raised his one-year target price for JetBlue to $20 from $10, saying that "investor interest is focusing on possible management and strategy changes that could great enhance earnings."

McAdoo recommended adding a first bag fee, which would result in an estimated $150 million to $200 million in annual revenue, and adding seats, which could add $250 million to annual pre-tax income.

Additionally, he recommended cutting unprofitable routes -- primarily trans-continental routes and routes from Boston. "Flights to/from and along the West Coast corridor are generally unprofitable and have been for several years," McAdoo wrote. "In addition, contrary to the comments in most quarterly earnings reviews, quite a number of the Boston domestic markets, including only those that have been in system for over a year, generate seven-figure losses annually."

McAdoo said that JetBlue's top 10 money losers include Boston to Dallas, LAX, Phoenix, Washington National, Charlotte, Buffalo and Seattle, which annually lose between $3 million and $7.4 million each. Additionally, trans-con flights from Fort Lauderdale and Dulles to San Francisco, Los Angeles and Long Beach, Calif., lose between $4.2 million and $6.6 million annually.

Written by Ted Reed in Charlotte, N.C.

To contact this writer, click here.

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TheStreet Ratings team rates JETBLUE AIRWAYS CORP as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation: 

"We rate JETBLUE AIRWAYS CORP (JBLU) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its solid stock price performance, impressive record of earnings per share growth, compelling growth in net income, revenue growth and attractive valuation levels. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • Powered by its strong earnings growth of 518.18% and other important driving factors, this stock has surged by 85.53% over the past year, outperforming the rise in the S&P 500 Index during the same period. Turning to the future, naturally, any stock can fall in a major bear market. However, in almost any other environment, the stock should continue to move higher despite the fact that it has already enjoyed nice gains in the past year.
  • JETBLUE AIRWAYS CORP reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, JETBLUE AIRWAYS CORP increased its bottom line by earning $0.51 versus $0.39 in the prior year. This year, the market expects an improvement in earnings ($0.69 versus $0.51).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Airlines industry. The net income increased by 538.9% when compared to the same quarter one year prior, rising from $36.00 million to $230.00 million.
  • The revenue growth significantly trails the industry average of 50.5%. Since the same quarter one year prior, revenues rose by 11.8%. Growth in the company's revenue appears to have helped boost the earnings per share.

At the time of publication, the author held no positions in any of the stocks mentioned. This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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