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Does It Make Sense to Add JetBlue to Your Portfolio?

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Jul. 24 2015, Updated 11:05 a.m. ET

JetBlue and the airline industry

Previously in this series, we discussed increased interest from hedge funds in low-cost airline operator JetBlue Airways (JBLU). We also took a look at its operating results and how the stock can continue to deliver attractive returns. In this part, we will assess whether it makes sense to have JetBlue in your portfolio on a relative value basis.

Based on a sample of 11 airline stocks belonging to the S&P Transportation ETF (XTN), the industry trades at a significant discount to the S&P 500 (SPY). The industry’s forward enterprise value to EBITDA (earnings before interest, taxes, depreciation, and amortization) multiple is 5.36x, which is at a 49.8% discount to the S&P 500 multiple. Although the airlines have trailed US equities so far, we may expect meaningful improvement in their performance as we enter the second half of the year.

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JetBlue, Alaska, and Delta appear to be great value picks

JetBlue Airways trades at a forward EV to EBITDA multiple of 5.35x, which is in line with its peer average. Alaska Air Group (ALK) trades at 5.55x, and Delta Air Lines (DAL) trades slightly lower at 5.00x. While airline operators as a whole appear to be undervalued compared with the broad market at this time, the aforementioned stocks stand out due to their stable cash flow generation. They are also below industry average leverage levels.

Based on Appaloosa Management’s trades executed in the first quarter of 2015, it appears that the fund was trying to exploit mispricings within the airline industry. It seems that the fund was trying to pick up gains from JetBlue and Delta, which appear to be a better bang for the buck, while eliminating or lowering exposures to stocks such as UAL and AAL.

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