Jetblue Ipo

JetBlue Airways IPO Valuation

Problem Statement:

This case examined the decision of JetBlue management to price the initial public offering (IPO) of its stock during one of the worst periods in airline industry after the aircraft terrorist attacks of September 2001.

Why public:

The decision to go public for JetBlue was a necessity since it had grown such successful in the previous years. The firm itself has been profitable on an annual basis, but in order to grow at the rate that management had envisioned, JetBlue needed to raise capital in amounts that were greater than management could risk or provide on their own. Therefore, setting up an IPO would be the only reasonable alternative, but there are Pros and Cons about doing this.

Pros of going public:

* Permit JetBlue to diversify its airline and capital structure

* Increase JetBlue’s reputation and potential markets

* Propel JetBlue more quickly growth

* Better market position and credibility of company

Cons of going public:

* High cost – ongoing costs of public reporting and maintaining requirements for public companies

* Management was going to have to give up some of the control that they had worked with in the previous years

* Cause mightier competition with other low-fare airlines, like Southwest, ATA, and AirTran

* Pressure on the management to increase the company earnings, quarter after quarter to meet investor expectations

Valuation:

Comparable Valuation:

According to Exhibit 7, we can find the median* PE Multiple of low-fare industry is 22.43. Based on the formula, Stock Price=EPS*PE Multiple,respectively multiply Diluted EPS ($1.14) and Pro forma EPS ($1.3) get an average stock price, $27.36.

Discounted Cash Flow Share Price Valuation

Using this approach, it is necessary to find out WACC as the discount rate first.

Foremost, using Beta of Southwest Airlines and the median of industry D/E Ratio finds the leveraged Beta for JetBlue, and calculates...