What a time to be dueling over JetBlue (NASDAQ:JBLU)! The U.S. airline industry is anything but a stock investor's paradise.
On Wednesday, Delta Airlines (NYSE:DAL) and Northwest (NASDAQ:NWAC) entered bankruptcy. There are now four major legacy carriers paying lawyers and listening to judges tell them what they can and can't do.
UAL's (OTC BB: UALAQ) United Airlines, the world's second-largest airline, has been in bankruptcy for almost three years. Its plan to exit bankruptcy leaves current shareholders with worthless stock certificates -- except for their keepsake value on eBay (NASDAQ:EBAY). Could a similar fate await Delta and Northwest shareholders?
US Airways has gone into bankruptcy twice -- in 2002 and 2004. AMR (NYSE:AMR), parent of American Airlines, avoided bankruptcy in 2003 with employee concessions, but may see the Delta and Northwest moves as reason to get itself a reduced cost structure.
Common logic would suggest that profitable companies can capitalize on troubled competition. Nice theory! When Southwest Airlines (NYSE:LUV) CEO Jim Parker was interviewed on The Motley Fool Radio Show, he saw other airlines' Chapter 11 filings as a competitive advantage for them. Although they can't pay their bills, they are allowed to restructure (lowering their costs) before coming back to compete.
Based on JetBlue's stock chart since its April 2002 initial public offering, you have to wonder why there is a bull case. Yes, it has been a roller-coaster ride, but it all adds up to dead money in a really bad industry.
Bearish numbers
From year-end 2002 to year-end 2004, JetBlue's revenue doubled to $1.2 billion. Over the same period, long-term debt more than doubled, to $1.4 billion. As of June 30, 2005 (the last reported quarter), trailing annual revenue was $1.5 billion and net debt (total debt minus cash) was $1.4 billion. Bears will notice that Delta, Northwest, and AMR have lower net-debt-to-revenue levels.
Net income comparisons don't give any reason for joy either, having gone from $54.9 million in 2002 to $47.5 million for 2004. That's bearish, especially after adding so much debt.
Interest on the company debt in 2004 was $44.6 million. While income before interest and taxes adequately covered that, totaling 2.7 times interest, that was still down from 5.5 times in 2002. Even worse, interest coverage fell to 2.1 times interest in the latest quarter. Ah, another bearish trend.
JetBlue is rapidly expanding, so debt is certain to grow. It has 77 Airbus A320 aircraft, with 156 more on order. There is also an order for 200 Embraer aircraft, the first of which arrived Tuesday. That's over $7.2 billion of aircraft on order.
Pause and reflect
Consider this. Southwest Airlines' trailing annual revenue (as of June 30) is $6.9 billion, almost five times that of JetBlue. Instead of net debt, Southwest has net cash (cash minus total debt) of $260 million. What little interest expense the company had last quarter was covered 13.8 times by income before interest and taxes.
The net income trend is positive at Southwest as well. It has increased from $241 million in calendar year 2002 to $313 million in calendar year 2004.
Southwest, in a phrase, is a class act.
The tale of the tape
JetBlue, with its massive expansion program, is expected to grow earnings 20% annually for the next five years. Southwest, with its national reach already established, doesn't need the massive debt build-up, yet it's still forecasted to increase earnings 14.5% annually. (For comparison, the S&P 500 is expected to grow earnings at 10.6%.)
Get this: JetBlue is selling for 55.8 times 2006 estimated earnings; Southwest tips the scale at a modest 23.6 times. For 2.4 times the multiple, you get a high-debt balance sheet for the potential of 5.5% greater annual growth -- assuming the analysts are right. JetBlue is selling at an extravagant premium and, to date, it's showing some very bearish trends.
You're not done. This is just a quarter of the Duel! Don't miss John Reeves' bullish riposte, W.D.'s bearish rebuttal, or John's final word. When you're done, you're still not done. You can vote and let us know who you think won this Duel.
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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Click here to see the Motley Fool's disclosure policy.
