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What’s Driving JetBlue Airways’ Valuation?

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Current valuation

Currently, JetBlue Airways (JBLU) is valued at 5.8x its forward EV to EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization). JetBlue’s valuation is slightly lower than its historical average of 7.2x.

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Peer comparison

JetBlue has one of the lowest valuations among major air carriers, just above Delta Air Lines’ (DAL) valuation of 5.4x. United Continental (UAL) is trading at a valuation similar to JetBlue’s of 5.8x. Spirit Airlines (SAVE) is trading at a valuation of 6.3x. American Airlines (AAL) and Alaska Air (ALK) are both trading at a 6.6x EV-to-EBITDA multiple. Southwest Airlines (LUV) has the highest valuation of 6.7x among major airlines. All legacy carriers are expected to record a decline in their EBITDA for 2017.

Valuation multiple drivers

For the short term, JetBlue’s valuation will be impacted by unit revenue trends. An unexpected decline in unit revenues for the first quarter led the stock to an 8.1% loss. A guidance update on second quarter unit revenue growth sent the stock soaring by 11%.

If JetBlue fails to deliver on this guidance, investors could punish the stock. On the other hand, even slightly better-than-expected results in comparison to the guidance could result in significant gains. So far, JetBlue seems on track to achieve its unit revenue guidance.

In the long term, given that the airline industry is cyclical, industry fundamentals will also play an important role. For example, if fuel prices rise substantially and airlines aren’t able to pass them on to customers, margins will fall, which would impact valuation multiples.

Investors can gain exposure to JetBlue Airways by investing in the iShares S&P Mid-Cap 400 Value ETF (IJJ), which invests 1.1% of its portfolio in the stock.

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