Cool JBLU Changes May Heat Up Stock

In yesterday’s Goldman Guide we mentioned the jobs number and the fact that the ‘good’ news is really not so good, as quality, full-time work seems to be lagging in the supposed recovery.

In June of 2012 we added JetBlue (NASDAQ – JBLU - $6.51) to our 30-30 picks.  The stock is up nearly 23% from our initial coverage and hit the 30% benchmark back in March of this year.

Yesterday, the Company announced some major changes in an effort to increase revenues by adding some luxury features.  These include a horizontal ‘suite seat’ with closable door and privacy, new lie-flat luxury seats with fine tune adjustment capabilities, and a 15-inch TV on flights from New York to San Francisco and New York to LA.  This will be offered sometime in Q2 2014 as part of offering first class flights on its Airbus A321 cross-country flights.

These transcontinental flights are highly profitable but highly contested as first or business class tickets can sell for up to $4,000.  American Airlines (OTC – AAMRQ), Delta Air Lines (NYSE – DAL), and United Air Lines (NYSE – UAL) are all in the process of adding the lie-flat seats for cross country flights.

Just as Southwest Airlines (NYSE – LUV) made a name for itself and grew exponentially as a no frills airline servicing commuter distance flights,  JetBlue has made a name for itself as a ‘small’ frills and convenience airline servicing Caribbean and Mexico vacation destinations as a specialty.  The ‘big boys’ mentioned above also fly to Europe and Asia where the costs of operating the luxury parts of the flight are offset by the other passengers. 

Whether or not the Company can keep costs under control will be the question.  JetBlue is estimating it can add an additional $1.4 billion in revenues with these new features.  Is this the right growth strategy given the nature of this economy?  Are there enough high end customers to support this strategy or are consumers still looking for value?

The stock is still fairly undervalued based on forecast EPS with a P/E under 10.  Additionally, the charts are on the bullish side in the short term.  JBLU is probably worth holding onto for the time being.

Have a great day.

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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