Jetblue Airways Ipo Valuation

JETBLUE AIRWAYS IPO Valuation

CONTENTS
Executive Summary………………………………………………………………………………………............2
Analysis…………………………………………………………………………………………...........................3
1. Advantages and Disadvantages of Going Public……………………………………………………………...3
2. IPO Pricing Approaches……………………………………………………………………………………...3
2.1 P/E Multiple………………………………………………………………………………………..........3
2.2 EBIT Multiple……………………………………………………………………… ...........................4
2.3 DCF model…………………………………………………………………………………………….. 4
3. Recommendation………………………………………………………………………………………….....
6
Appendix 1, P/E Multiple Analysis………………………………………………………………………............7
Appendix 2, EIBT Multiple Analysis……………….…………………………………………………............7
Appendix 3, Cost of Capital(WACC)……………………………………………………………………............8
Appendix 4, DCF Share Price Valuation…………………………………………………………………............9
Appendix 5, Sensitivity Analysis………………………………………………………………………............10

1

Executive Summary
Founded in February 1999, JetBlue Airways has experienced the rapid growth in the past decade, especially

made profit during the sharp downturn in the airline travel following the Sept 11 attacks. It becomes one of the
most popular low-fare airlines in USA for offering the comfortable point-to-point air travel with unique
amenities (for example, leather seats and live-feed TV monitors). The high profit comes from the successful
control on cost. JetBlue affords greater economies of scale because the airline had only one model of aircraft
A320 which is reliable and fuel-efficient. Therefore, the pilots training process is quiet easy and effective.
Besides, based on the internet service, most of employees work at home, saving administrative expenses.
To support JetBlue’s growth and offset portfolio losses by VC investors, management was ready to raise
additional capital through a public equity offering. From the prospectus, we can see the capital was mainly used
for working capital and capital expenditure, including purchasing aircrafts.
The lead underwriter for the JetBlue IPO, Morgan Stanley, had initially calculated a price per share of $22
to $24. However, with sizeable excess demand for the 5.5 million shares being offered; they had adjusted the
range upwards ($25 to $26). This report utilized three different share valuation methods: 1) Price/earnings
multiple (comparison pricing); 2) EBIT multiple (comparison pricing); and 3) Discounted free
cash flows(fundamentals pricing).
We conclude that the JetBlue offering price should be $26 to $29. The current suggested price is
underpricing and will leave too much money on the table.

Analysis
1. Advantages and Disadvantages of Going Public
It was beneficial for company to develop more destinations and increase the competitiveness. From a
financing perspective, JetBlue investors will gain access to a more liquid equity market,
which will reduce
2
JetBlue’s cost of capital from the much higher cost of private equity. Additionally, the new equity will lower
the debt to equity ratio. With a lower debt to equity ratio, JetBlue will then have increased access to the debt

market with more favorable terms and take advantage of the tax advantages provided by debt financing. Last
but not least, increasing market potential also benefits the firm and makes it easy to market the product because
the public will be more familiar with the products.
However, issuing common stock does have disadvantages. Obviously, there are some direct fees for
company. JetBlue will have to pay legal, accounting, and underwriting fees associated with public offerings.
Also, information will be available to the competitors after listing on the stock market. Management may lose
control of its decision-making abilities. Finally, the price sometimes does not represent the true value of the
company so that the company may suffer from losing wealth.
2. IPO Pricing Approaches
Since JetBlue management claim not to pay any dividends on their common stock, we choose to use the
Market Multiple Approach and DCF Approach to evaluate the stock price rather than using The Dividend
Growth Model.
2.1 P/E Multiple
In our analysis, we choose only low-cost and positive airline as samples (AirTran, Frontier, Ryanair,
Southwest and WestJet). Because of the small sample size and the frontier’s outlying performance, we prefer to
choose the median number of the PE Multiple sample to represent JetBlue’s trailing and leading PE multiple.
For Trailing, the earnings/share is 1.14(Diluted Earnings Per Common Share in Exhibit 3). For Leading, the
earnings/share is 1.30(Pro forma basic Earnings Per Common Share in Exhibit 3). The Price/Share is calculated
using the formula Price/Share= Earnings/Share * PE Multiple. More specific details are shown in Appendix 1.
2.2 EBIT Multiple
For the same reason as we explained in P/E Ratio above, we also choose AirTran, Frontier, Ryanair,
Southwest and WestJet as our sample and median number of the sample EBIT Multiple to represent JetBlue’s
trailing and leading EBIT multiple.
The Price/Share is calculated using the formula Price/Share= EBIT ／Share * EBIT Multiple. In case of
JetBlue, the number of premoney shares was 35.1 million, so EBIT/Share for Leading=
3 80/(35.1+5.5)=1.97.
Before the year of 2002, there is no stocks for JetBlue, so we choose median of sample to respect the
EBIT/Share for trailing.

We can get the price/Share is 14.21 for trailing and 28.12 for leading. Because we choose the median
number of sample as EBIT/Share for trailing, it is less reasonable than that for leading. More specific details in
Appendix 2.
2.3 Discounted Cash Flow Model
 Weighted Average Cost of Capital (WACC)
First of all, we need to calculate its WACC to discount the cash flows. Without required data of JetBlue, we
use the information of Southwest Airlines. As the pioneer and dominant company in US’s low-fare airlines,
Southwest can be a comparable company for JetBlue. Thus, Southwest’s WACC would be a proper estimation.
When calculating the WACC of Southwest (Appendix 3), we use the following assumptions:
1. The cost of debt (8.68%) is yield to maturity of a Debenture of Southwest Airlines. The YTM of longterm debt is more stable. We choose the highest YTM among Southwest’s long debt, because creditors
may require a higher return as JetBlue is a younger company.
2. Corporate income tax rate is as the expected 2002 tax rate, which is 38.5%.
3. Risk-free rate (5%) and market risk premium (5%) are as stated in April 2002.
4. Book value of total debt in 2001 ($1,842) is used as an approximation for value of debt (D), because the
market value of debt is unknown.
5. Value of Equity (E) is estimated by recent stock price ($20.69) multiple the number of common shares
outstanding (776.8 million).
With Southwest’s capital structure and the above assumptions, we calculate the WACC as 9.97%.
 Discounted Cash Flow Share Price Valuation
As can be seen in Appendix 4, we calculate the free cash flow for the next ten years and the terminal value,
which is the present value at 2010 of all cash flows afterwards. We use another assumptions as:
1.

The cash flows since year 2010 will grow at a constant rate, so the constant-growth model is used.
TV2010=CF2011/WACC-g

2.

The constant growth rate is the average of expected inflation rate for revenue (4%)4 and expected inflation
rate for capital expenditure (5%), i.e. g=4.5%

expected real growth rate:2%

Expected Inflation rate : 3%

Expected Nominal growth rate: 5%
3. The number of shares is sum of common stock offered in IPO (5.5 million) and premoney shares
outstanding (35.1 million), as 40.6 million.
We discount the free cash flows and terminal value by WACC, and calculate the NPV as $1019.81. Dividing by
the number of shares, we gain the share price at $25.12.
 Sensitivity Analysis
We have done a sensitivity analysis (Appendix 5) to show the effect of change in constant growth rate and
WACC. We adjust 5% in either growth rate or WACC, then the share price will changed by 7.3%-26%. The
effect of WACC indicates the value of IPO to the company. JetBlue can reduce its WACC further by lower cost
of debt and the tax shield benefit. As a result, the share price will increase with lower WACC.
3.

Recommendation
Based on the analysis above, we can conclude that the JetBlue Airways IPO price should be in the range

of $26 to $29 because the median and average price are in it. The average of estimated price is 26.65 and the
median is 28.12. The current suggested price is underpricing and will leave too much money on the table.

5

Appendix 1

　

PE Multiple Analysis
　
Trailing

　
AirTran
Frontier
Ryanair
Southwest
WestJet
Average
Median
JetBlue(trailing)
JetBlue(leading)

Price/
Earnings
Share
/ Share
$6.60
0.26
$17.00
2.03
$32.05
0.73
$18.48
0.67
$15.85
0.81
　
0.90
　
0.73
$28.83
1.14
$36.96 　

Leading
PE
Multip
le
25.29
8.37
44.02
27.59
19.57
24.97
25.29
25.29
　

PE
Earnings Multip
/ Share
le
0.33
20.00
0.37
45.95
0.94
34.10
0.65
28.43
0.59
26.86
0.58
31.07
0.59
28.43
　
　
1.30
28.43

Appendix 2

AirTran
Frontier
Ryanair
Southwest
WestJet
Average
Median
JetBlue(trailing)
JetBlue(leading)

EBIT Multiple Analysis
Trailing
Book
EBIT
Price/
Debt/
EBIT/ multip
Share
Share
Share
le
6.60
3.96
0.81
13.04
17.00
0.01
2.99
5.69
32.05
3.33
0.92
38.45
18.48
1.79
1.09
18.60
15.85
0.97
1.32
12.74
1.43
17.70
1.09
13.04
14.21
1.09
13.04
28.12

Leading
EBIT/
Share
0.76
0.64
1.17
1.42
1.59
1.12
1.17

EBIT
multip
le
13.89
26.58
30.26
14.27
10.58
19.12
14.27

1.97

14.27

6

Appendix 3

Southwest Airlines--Cost of Capital
Cost of debt, RD
8.68%
Tax rate, Tc
38.50%
After-tax cost of debt RD(1-Tc)
5.34%
Beta
Risk-free rate, Rf
Market risk premium, RM-Rf
RE=Rf+β(RM-Rf)
Debt, D
Equity, E
WD=D/D+E
WE=E/D+E

1.1
5%
5%
10.50%
1842
16072
10.28%
89.72%

WACC=WE*RE+WD*RD*(1-Tc)
9.97%
不能用 total debt, 应只用 long term 的 1842------1214

Appendix 4
7

DCF Share Price Analysis

Year

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Revenue

320.41

599.69

883.88

1191.91

1485.19

1801.98

2143.77

2466.48

2694.21

2912.33

Cash expenses

283.08

502.22

723.28

975.14

1214.83

1473.63

1752.77

2016.19

2201.88

2379.62

Depreciation

10.42

17.71

26.25

35.60

44.62

54.45

65.15

75.38

82.82

90.04

26.91

79.76

134.35

181.17

225.75

273.90

325.85

374.90

409.52

442.67

EBIT
Tax

9.15

27.12

45.68

61.60

76.75

93.13

110.79

127.47

139.24

150.51

NOPAT

0.34

17.76

52.64

88.67

119.57

148.99

180.77

215.06

247.44

270.28

292.16
132.00

Capital expenditure

234.00

290.37

328.34

344.76

310.29

325.80

342.09

299.33

157.15

Net working capital

33.91

63.47

93.54

126.14

157.18

190.71

226.88

261.03

285.13

308.22

Fixed assets

529.51

802.17

1104.27

1413.42

1679.09

1950.45

2227.39

2451.34

2525.67

2567.64

70.35

114.92

155.17

193.61

235.22

280.21

322.82

353.10

382.20

29.56

30.08

32.60

31.04

33.53

36.17

34.15

24.10

23.08

290.37

328.34

344.76

310.29

325.80

342.09

299.33

157.15

132.00

terminal
value

-249.58

-243.50

-222.19

-147.71

-124.10

-98.05

-10.66

171.85

227.11

4338.81

OCF
ΔNet working capital
NCS
FCF˅
NPV

1019.81

Share(millions)

40.60

Price

$25.12

求 FCF 如果只考虑 2002 到 2010 年的 FCF，这会得到负的 NPV
但是公司是持续经营的，需要求出 terminal value.
Appendix 5

Sensitivity
Analysis

WACC

9.47%
9.97%
10.47%

4%
23.15
21.48
19.89

Terminal growth rate
4.5%
26.96
25.12
23.37

5%
31.54
29.49
27.55

8