JetBlue Popped: What You Need to Know
Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of eccentrically capitalized JetBlue Airways (NAS: JBLU) popped 10% in Monday trading, lifted (presumably) by a Bloomberg report suggesting there's a movement afoot among airlines to trim excess capacity.
So what: It's Economics 101, folks. When supply (of airplane seats) decreases, but demand for air travel remains the same, prices must rise. Investors seeing capacity cutbacks at Delta (NYS: DAL) , Southwest (NYS: LUV) , and AMR (NYS: AMR) are drawing the logical conclusion that higher prices, when they come, will be good news for everyone's profits -- JetBlue included.
Now what: They're probably right about that -- but it still doesn't make JetBlue a "buy." While the company's shares don't look particularly expensive at 14 times earnings, you've got to look at that P/E in the context of long-term earnings growth expectations, which currently hover around 7% for JetBlue. Even a modest increase in profitability probably isn't enough to make these shares "cheap." For that to happen, we'd need JetBlue literally to double its earnings power -- and in a competitive industry like air travel, I just don't see that happening.
Is JetBlue as cheap as it looks? Will its shares fly even higher?Add jetBlue to your Fool Watchlist, and find out.
At the time this article was published Fool contributorRich Smithowns shares of Southwest Airlines. The Motley Fool has adisclosure policy. Motley Fool newsletter serviceshave recommended buying shares of Southwest Airlines. Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
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