It’s always a good time to consider exposure to a stock or sector when sentiments are dominantly bearish. Of course, there needs to be visibility for tailwinds in the future.
JetBlue Airways (NASDAQ:JBLU) seems to be among the quality names in the airline sector. Vaccinations and the re-opening of the economy triggered a rally in the stock to highs of $21.96. However, the stock has corrected on concerns of potential delay in recovery due to the Delta variant. (See JetBlue stock charts on TipRanks)
The correction seems like a good opportunity to consider exposure. I am bullish on JetBlue, with a strong balance sheet being a key factor.
Airline Industry Recovery
The International Air Transport Association believes that in 2021, global passenger numbers are expected to recover to 52% of pre-COVID levels. Further, passenger numbers are expected to improve to 88% of pre-COVID levels in 2022.
Another report by Flight Global estimates that business travel in the United States is likely to hit 80% of 2019 levels by the end of 2022.
These estimates might be pushed further by a quarter or two due to the Delta variant. However, there is little doubt that there is a pent-up travel demand.
JetBlue Is a Fundamentally Strong Play
When it comes to recovery and profits, the balance sheet is an important consideration. Airline companies significantly burdened with debt during the pandemic will take several years to deleverage. During this period, debt-servicing costs will be high, and will impact shareholder value creation.
For JetBlue, things look better from a balance sheet perspective. As of Q2 2021, the company reported an adjusted-debt-to-capitalization ratio of 55%. Further, the company ended the quarter with a robust liquidity buffer of $3.7 billion. This will help the company navigate the coming quarters of cash burn.
Another important point to note is that the company reduced net debt to $0.9 billion in Q2 2021. Net debt is already below pre-COVID levels. By 2024, JetBlue plans to reduce the debt-to-capital ratio to 30% to 40%.
Focused on Expansion
With a low financial risk profile, JetBlue is focused on expansion in the coming years. This is likely to translate into incremental EBITDA and cash flows.
For instance, JetBlue has partnered with American Airlines (NASDAQ:AAL) to offer customers more than more than 700 daily flights from New York and Boston. Similarly, the company has announced 32 new routes this year.
It’s also worth noting that as of December 2020, JetBlue had a fleet of 201 owned aircraft. Over the next seven years, the company has a pipeline of 141 aircraft deliveries.
Considering the company’s low leverage, financing the deliveries is unlikely to be a challenge. Importantly, there is steady revenue and cash flow upside visibility for the next few years.
Of course, uncertainties related to the pandemic are risks. However, once that headwind wanes, JetBlue is positioned for healthy growth.
Wall Street’s Take
According to TipRanks’ analyst consensus rating, JBLU stock comes in as a Moderate Buy, with five Buys, and four Holds assigned in the past three months.
The average JetBlue price target is $20.56 per share, implying 33.3% upside potential from current levels.
JetBlue has a healthy financial profile, and the stock seems attractively valued. The company is emerging from the crisis with a strong balance sheet that will allow JetBlue to pursue aggressive expansion.
At current levels, the downside risk seems limited, but the upside potential can be significant.
The stock seems worth considering for a contrarian investor, with a medium-to-long-term investment horizon.
Disclosure: At the time of publication, Faisal Humayun did not have a position in any of the securities mentioned in this article
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