Still Holding JBLU

By Martin Denholm and Ian L. Cooper

If you're holding shares in JetBlue, you may have noticed the company's stock slump by 17.6% last Friday. On the face of it, this certainly isn't good news. But look beyond the figure and you'll see that this was a complete overreaction by the market.

In an unusual move, company chairman David Neeleman came out and announced that fourth-quarter profit margins were likely to be squeezed a little due to fierce industry competition for seats, higher aviation fuel costs, and the wildfires on the west coast (one of JetBlue's main operating hubs).

He only revised down the fourth-quarter profit margin forecast by 2% to 3%, which still leaves JetBlue sporting a very healthy operating margin of 13% to 14% for the October-December period. But the market latched on to the comments and sent the stock tumbling. We think this was too harsh, as evidenced by the stock's strong comeback today. It's currently up 7.2% to US$27.70 and has been upgraded by Merrill Lynch with a US$32 price target.

JetBlue will put three more aircraft into service by the end of the year, with more expansion set to come in 2004. And lost among the selling scramble was the fact that November traffic increased by 57.6%, while the carrier's load factor (the percentage of seats filled) also rose by 2.3% to 81.6%.

It also doesn't hurt that JBLU's lowered operating margin of 13% to 14% is likely to be one of the best in the industry for the quarter.

Yes, competition is fierce, and we're watching out for how higher fuel costs will affect the company, particularly with the new planes in operation. But we stick to the view that JBLU's future prospects look rosy.