Jetblue

Executive Summary - JetBlue

Name: Josh Temple

Group name or #: 7

Problem or issue:

In 2002, JetBlue founder David Neeleman decided to take the company public. This case discusses the intricacies of the IPO process. For JetBlue, most analysts agree that it is a good investment. JetBlue’s management team is debating on raising the pricing policy for the IPO. Analysts see high demand in the stock, which has the some members of the group worried that the current pricing range is going to leave too much money on the table. Others argue that being conservative with the IPO would meet its short term capital needs and also maintain access to future capital. It would also provide positive returns to crew members and others that will receive shares from the IPO. Being conservative on the pricing policy could also prove beneficial considering the risks related to the airline industry shortly after the 9/11 terrorists attacks.

Analysis and discussion:

The comparable-multiple approach is used to compare market multiples of similar type and size companies in order to benchmark their stocks value. In JetBlue’s case this would be low cost airlines. Using the average of P/E multiple, total capital multiple, and EBIT multiple would result in a strong pricing for JetBlue. Disadvantages to this method would be companies that are outliers that could make the IPO value un-proportional. The dividend growth model and Gordon growth model will not be used in this case because JetBlue hasn’t issued and don’t plan on issuing any dividends anytime soon. Using the discounted cash flow method, the value of the stock at its IPO is 25.59. I got this using the formula FCF/(WACC-g)=value. The WACC I calculated to be 9.21%. I used the beta of a similar low-cost leader, Southwest Airlines.

I found the 10 year projection (Exhibit 13) to have limited uses. In 10 years, the economy could go through several recessions, jet fuel prices could skyrocket, and other unforeseen elements can...