How to Profit from Jetblue's Merger - InvestingChannel

How to Profit from Jetblue’s Merger

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🤑 Financial Pros Seek an Edge from Jetblue’s Merger

JetBlue (JBLU) plans to buy Spirit Airlines (SAVE).

The only thing standing in their way is the Department of Justice.

Spirit stockholders approved the merger in October, 2022. The DOJ says it violates antitrust laws, a cudgel it’s wielded often in the last few years.

The case sits before a judge, and odds are it will be approved with an expected close date by 2024. At least, that’s what the search patterns by financial pros suggest based on our Trackstar Data.

We believe the merger unlocks long-term value for Jetblue shareholders. But before you jump into the stock, there are important details you should know.

JetBlue’s Business

As a low-cost international airline, JetBlue services the same niche as Spirit, Allegiant (ALGT), and other discount carriers.

The merger between JetBlue and Spirit would create the 5th largest airline behind big players like Delta (DAL) and American (AAL).

JetBlue’s current network extends across the Atlantic and down into South America, though most of its destinations are along the Eastern Seaboard.


Source: JetBlue Website

Many of Spirit’s destinations overlap with JetBlue’s, creating opportunities for network efficiencies.


Source: Spirit Website

The merger proposes $3.5 billion for Spirit, financed with $2.5 billion of debt and $1.5 billion in new equity.

Spirit shareholders receive $33.50 per share, including a prepayment of $2.50 per share upon approval of the transaction and a $0.10 per month ticking fee that started in January 2023.



Source: Stock Analysis

Like every other airline, Covid devastated JetBlue. However, it rebounded and surpassed all-time high revenues, driven by better volume and higher ticket prices.

However, they’ve struggled to remain profitable, with no single item contributing to elevated operating expenses.

While operating cash flow is mainly positive, it’s less than the $1 billion in annual CAPEX, leading to negative free cash flow.

Surprisingly, they only hold $4.7 billion in debt, not massively higher than the $3.7 billion they had in 2019.



Source: Seeking Alpha

Neither JetBlue nor Spirit are positive on a P&L basis. However, JetBlue is relatively cheap on a price-to-cash flow basis.

It’s the cheapest measured by price-to-sales. However, American Airlines is just barely higher on the same metric. And it’s cheaper on a price-to-cash flow and generates a an accounting profit.



Source: Seeking Alpha

Every airline benefited from the post-pandemic travel boom. Given the forecasts for the next year, tight capacity will likely keep ticket prices high.

What’s interesting is JetBlue’s revenue growth, although decent, lags most of its peers across multiple categories.



Source: Seeking Alpha

JetBlue’s gross margins are the best part of its profitability. Its free-cash-flow is negative unlike Delta (DAL) and American. And with the stock’s price below $5.00, it’s no surprise the return on equity is negative while the return on assets and total capital are as well.

Our Opinion 8/10

JetBlue is dirt cheap. But it’s not profitable. And it’s got a cash flow problem.

So why would we rate this an 8/10?

Because the risk/reward on this is too good to pass up.

None of the other airlines have the opportunity to significantly increase the number of markets they serve the way JetBlue does. And we see a lot of synergies from the overlap with Spirit’s network.

While it’s a risky play, and one you should size appropriately, we think there is a lot of upside over a multi-year timeframe.

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