JETBLUE AIRWAYS IPO Valuation
CONTENTS
Executive Summary (2)
Analysis (3)
1. Advantages and Disadvantages of Going P ublic (3)
2. IPO Pricing A pproaches (3)
2.1 P/E Multiple (3)
2.2 EBIT Multiple................................................................................. (4)
2.3 DCF model (4)
3.Recommendation (6)
Appendix 1, P/E Multiple Analysis (7)
Appendix 2, EIBT Multiple Analysis (7)
Appendix 3, Cost of Capital(WACC) (8)
Appendix 4, DCF Share Price Valuation (9)
Appendix 5, Sensitivity Analysis (10)
Executive Summary
Founded in February 1999, JetBlue Airways has experienced the rapid growth in the past decade, especially made profit during the sharp downturn in the airline travel following the Sept 11 attacks. It becomes one of the most popular low-fare airlines in USA for offering the comfortable point-to-point air travel with unique amenities (for example, leather seats and live-feed TV monitors). The high profit comes from the successful control on cost. JetBlue affords greater economies of scale because the airline had only one model of aircraft A320 which is reliable and fuel-efficient. Therefore, the pilots training process is quiet easy and effective. Besides, based on the internet service, most of employees work at home, saving administrative expenses.
To su pport JetBlue’s growth and offset portfolio losses by VC investors, management was ready to raise additional capital through a public equity offering. From the prospectus, we can see the capital was mainly used for working capital and capital expenditure, including purchasing aircrafts.
The lead underwriter for the JetBlue IPO, Morgan Stanley, had initially calculated a price per share of $22 to $24. However, with sizeable excess demand for the 5.5 million shares being offered; they had adjusted the range upwards ($25 to $26). This report utilized three different share valuation methods: 1) Price/earnings multiple (comparison pricing); 2) EBIT multiple (comparison pricing); and 3) Discounted free cash flows(fundamentals pricing).
We conclude that the JetBlue offering price should be $26 to $29. The current suggested price is underpricing and will leave too much money on the table.
Analysis
1.Advantages and Disadvantages of Going Public
It was beneficial for company to develop more destinations and increase the competitiveness. From a financing perspective, JetBlue investors will gain access to a more liquid equity market, which will reduce JetBlue’s cost of capital from the much high er cost of private equity. Additionally, the new equity will lower the debt to equity ratio. With a lower debt to equity ratio, JetBlue will then have increased access to the debt market with more favorable terms and take advantage of the tax advantages provided by debt financing. Last but not least, increasing market potential also benefits the firm and makes it easy to market the product because the public will be more familiar with the products.
However, issuing common stock does have disadvantages. Obviously, there are some direct fees for company. JetBlue will have to pay legal, accounting, and underwriting fees associated with public offerings. Also, information will be available to the competitors after listing on the stock market. Management may lose control of its decision-making abilities. Finally, the price sometimes does not represent the true value of the company so that the company may suffer from losing wealth.
2. IPO Pricing Approaches
Since JetBlue management claim not to pay any dividends on their common stock, we choose to use the Market Multiple Approach and DCF Approach to evaluate the stock price rather than using The Dividend Growth Model.
2.1P/E Multiple
In our analysis, we choose only low-cost and positive airline as samples (AirTran, Frontier, Ryanair, Southwest and WestJet). Because of the small sample size and the frontier’s outlying performance, we prefer to choose the median number of the PE Multiple sample to represent JetBlue’s trailing and leading PE multiple.
For Trailing, the earnings/share is 1.14(Diluted Earnings Per Common Share in Exhibit 3). For Leading, the earnings/share is 1.30(Pro forma basic Earnings Per Common Share in Exhibit 3). The Price/Share is
calculated using the formula Price/Share= Earnings/Share * PE Multiple. More specific details are shown in Appendix 1.
2.2EBIT Multiple
For the same reason as we explained in P/E Ratio above, we also choose AirTran, Frontier, Ryanair, Southwest and WestJet as our sample and median number of the sample EBIT Multiple to represent JetBlue’s trailing and leading EBIT multiple.
The Price/Share is calculated using the formula Price/Share= EBIT／Share * EBIT Multiple. In case of JetBlue, the number of premoney shares was 35.1 million, so EBIT/Share for Leading= 80/(35.1+5.5)=1.97. Before the year of 2002, there is no stocks for JetBlue, so we choose median of sample to respect the EBIT/Share for trailing.
We can get the price/Share is 14.21 for trailing and 28.12 for leading. Because we choose the median number of sample as EBIT/Share for trailing, it is less reasonable than that for leading. More specific details in Appendix 2.
2.3 Discounted Cash Flow Model
Weighted Average Cost of Capital (WACC)
First of all, we need to calculate its WACC to discount the cash flows. Without required data of JetBlue, we use the information of Southwest Airlines. As the pioneer and dominant company in US’s low-fare airlines, Southwest can be a comparable company for JetBlue. Thus, Southwest’s WACC would be a proper estimation. When calculating the WACC of Southwest (Appendix 3), we use the following assumptions:
1.The cost of debt (8.68%) is yield to maturity of a Debenture of Southwest Airlines. The YTM of long-term debt is more stable. We choose the highest YTM among Southwest’s long debt, because creditors may require a higher return as JetBlue is a younger company.
2.Corporate income tax rate is as the expected 2002 tax rate, which is 38.5%.
3.Risk-free rate (5%) and market risk premium (5%) are as stated in April 2002.
4.Book value of total debt in 2001 ($1,842) is used as an approximation for value of debt (D), because the market value of debt is unknown.
5.Value of Equity (E) is estimated by recent stock price ($20.69) multiple the number of common shares outstanding (77
6.8 million).
With Southwest’s capital structure and the above assumptions, we calculate the WACC as 9.97%.
●Discounted Cash Flow Share Price Valuation
As can be seen in Appendix 4, we calculate the free cash flow for the next ten years and the terminal value, which is the present value at 2010 of all cash flows afterwards. We use another assumptions as:
1.The cash flows since year 2010 will grow at a constant rate, so the constant-growth model is used.
TV2010=CF2011/WACC-g
2.The constant growth rate is the average of expected inflation rate for revenue (4%) and expected inflation
rate for capital expenditure (5%), i.e. g=4.5% expected real growth rate:2%
Expected Inflation rate : 3%
Expected Nominal growth rate: 5%
3.The number of shares is sum of common stock offered in IPO (5.5 million) and premoney shares outstanding (35.1 million), as 40.6 million.
We discount the free cash flows and terminal value by WACC, and calculate the NPV as $1019.81. Dividing by the number of shares, we gain the share price at $25.12.
●Sensitivity Analysis
We have done a sensitivity analysis (Appendix 5) to show the effect of change in constant growth rate and WACC. We adjust 5% in either growth rate or WACC, then the share price will changed by 7.3%-26%. The effect of WACC indicates the value of IPO to the company. JetBlue can reduce its WACC further by lower cost of debt and the tax shield benefit. As a result, the share price will increase with lower WACC.
3.Recommendation
Based on the analysis above, we can conclude that the JetBlue Airways IPO price should be in the range of $26 to $29 because the median and average price are in it. The average of estimated price is 26.65 and the median is 28.12. The current suggested price is underpricing and will leave too much money on the table.
Appendix 1
Appendix 2
Appendix 3
不能用total debt, 应只用long term 的1842------1214
Appendix 4
DCF Share Price Analysis
求FCF 如果只考虑2002到2010年的FCF，这会得到负的NPV 但是公司是持续经营的，需要求出terminal value.
Appendix 5
HIPO图绘制方法 在系统设计中，必须将数据流程图上的各个处理模块进一步分解，确定系统模块层次结构关系，从而将系统的逻辑模型转变为物理模型。进行模块层次功能分解的一个重要技术就是HIPO图方法。 任何功能模块都是由输入、处理、输出三个基本部分组成，HIPO图方法的模块层次功能分解正是以模块的这一特性以及模块分解的层次性为基础，将一个大的功能模块逐层分解，得到系统的模块层次结构，然后再进一步把每个模块分解为输入、处理和输出的具体执行模块。 HIPO图由三个基本图表组成，进行模块层次功能分解遵循以下步骤： 1、总体IPO图：它是数据流程图的初步分层细化结果，根据数据流程图，将最高层处理模块分解为输入、处理、输出三个功能模块。 2、HIPO图：根据总体IPO图，对顶层模块进行重复逐层分解，而得到的关于组成顶层模块的所有功能模块的层次结构关系图。 3、低层主要模块详细的IPO图：由于HIPO图仅仅表示了一个系统功能模块的层次分解关系，还没有充分说明各模块间的调用关系和模块间的数据流及信息流的传递关系。因此，对某些输送低层上的重要工作模块，还必须根据数据字典和HIPO图，绘制其详细的IPO图，用来描述模块的输入、处理和输出细节，以及与其他模块间的调用和被调用关系。 [next] 模块的层次功能分解 系统设计阶段首先要进行信息系统结构设计，就是采用结构化设计方法，从计算机实现的角度出发，设计人员对系统分析阶段划分的子系统进行校核，使其界面更加清楚明确，并在此基础上，根据数据流程图和数据字典，借助一套标准的设计准则和图表工具，将子系统进一步逐层分解，直至划分到大小适当、功能单一、具有一定独立性的模块为止，把一个复杂的系统转换成易于实现、易于维护的模块化结构系统。如图4-13所示。由此可见，合理进行模块分解和定义是系统设计的主要内容。 图4-13 模块化结构图的一般形式 模块是可以组合、分解和更换的单元，是组成系统、易于处理的基本单位。一个模块应具备以下四个要素： 1、输入和输出：输入来源和输出去向，在一般情况下是同一调用者。