IPO Vluation; Jet Blue-Airways PDF

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IPO Valuation: JetBlue Airways

IPO Valuation: JetBlue Airways

Submitted to: Dr. M. Sadiqul Islam Professor Department of Finance Faculty of Business Studies University of Dhaka

Submitted by: Sl. No.

Name

ID

1.

Khairul Islam

23-012

2.

Omer Sany Prakash

23-067

3.

Ashik Hossain

23-200

4.

Shanjida Akter

23-203

Marks

Section: A Class of 2020 Department of Finance University of Dhaka

Date of Submission: August 16, 2020

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Letter of Transmittal August 16, 2020 Dr. M. Sadiqul Islam Professor Department of Finance University of Dhaka.

Subject: Submission the report on “IPO Valuation: JetBlue Airways”.

Dear Sir: As per the instructions, We have completed the report that you instructed and developed based on ‘IPO Valuation: JetBlue Airways’ as a requirement of the course F- 403. We earnestly hope that the report will succeed in reaching your level of expectations. We have tried hard to make this report as comprehensive as possible but we would appreciate that you rectify us in case you identify any mistakes. We thankful to you for giving the opportunity of widening our knowledge from the pages of the textbook to the practical field.

Sincerely yours _____________ Omer Sany Prakash On behalf of our Group BBA- 23rd Batch Section: A Department of Finance University of Dhaka.

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Table of Contents Executive Summary.........................................................................................................................1 Introduction......................................................................................................................................2 Company Profile..........................................................................................................................2 Management................................................................................................................................2 Products & Services.....................................................................................................................2 Corporate Strategy.......................................................................................................................2 Economy Analysis...........................................................................................................................4 Business Cycle.............................................................................................................................4 Company Analysis...........................................................................................................................6 SWOT Analysis...........................................................................................................................6 IPO Valuation...................................................................................................................................7 IPO and Its Significance..............................................................................................................7 Advantages and Disadvantages...................................................................................................7 Different Approaches of Share Valuation....................................................................................7 Recommendation...........................................................................................................................13

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Executive Summary JetBlue is one of the awards winning the Airline Company. After effectively operating the business for specific years, it is now prepared to raise extra capital through an IPO. Per share's underlying value was $22 to $24, with 5.5 million shares where the absolute number of share extraordinary was 40578829. Be that as it may, after specific changes, the value range was redetermined, and it was $25 to $26. JetBlue's management believes that an effective IPO involved raising the momentary capital needs and keeping up access to future capital. We used two different share valuation approaches. One is Market multiple approach and another is DCF valuation model. After amazing all the method, we can conclude that the company can set a range of its per share price at $27 to $30.

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Introduction Company Profile JetBlue is one of the global, award-winning travel companies in the world born at JFK in 1999. The Company provides air transportation services across Florida, Buffalo, and New York. This Company operates various kinds of aircraft, including Airbus A320. It has successfully opened 24 aircraft with a normal of 108 day by day flights. This Company operates in more than 17 destinations.

Management The executive team of JetBlue airways consists of the following members: 

David Neeleman: Chief Executive Officer



Dave Burger: President & Chief Operating Officer



Thomas Kelly: Executive Vice President



John Owen: Executive Vice President & CFO

Products & Services This organization intends to acquaint new travel ideas with its portfolio that will quicken revenue development for JetBlue. JetBlue gives some major products, as well as services, are given below: 

Airbus A320 JETS



First Bag Free Service



Leather Seats



Live TV



Extra Legroom



Pre-Assigned seats



Food & Beverages

Corporate Strategy JetBlue followed the cost leadership approach. David Neeleman, the founder of JetBlue, presented a methodology of offering low-cost travel. It has figured out how to separate itself 2|Page

from its rivals by its unique services remembering For Flight entertainment, TV on each seat and satellite radio, extra legroom, etc.

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Economy Analysis Business Cycle The business cycle is the overall contraction and expansion of gross domestic product (GDP) of an economy over time. Every economy has to experience four phases: expansion, peak, contraction, and trough. Expansion is the stage where the economy is growing, unemployment is decreasing. The peak is the highest point of growth of an economy where the economy is producing at the highest possible level and there is full employment. In contraction, the economy faces the opposite of expansion where growth declines and unemployment increases. The economy reaches trough through contraction where output is at lowest and unemployment is at highest. The economy of USA experienced contraction after the attacks of 9/11 as the economy was

Figure 01: Business Cycle already going through a recession in 2001. The recession started in the month of March in 2001 when the economy contracted by 1.1%. In the day of the attack, NYSE and NASDAQ stopped 4|Page

trading and stayed closed for 6 more days and all financial institutions around the area were also closed and evacuated. Stock exchanges in many European countries were also shut down after the attack. In the next opening day after the attack, the NYSE saw a point decline of 7.1%. The airline industry and the insurance industry took the highest damage. The number of air travellers decreased substantially. The share prices of the companies of airline industry fell by a lot. Though the government offered aid packages to the airlines industry a lot of companies went bankrupt. But surprisingly, though the economy bounced back very fast. The attack contracted the economy by 1.7% in the third quarter but the economy experienced growth in the fourth quarter. But still, the decrease in air travellers continued till 2005 when the number of air travellers matched the number of air travellers before the attack.

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Company Analysis SWOT Analysis SWOT analysis is the identification of the strengths, weaknesses, opportunities and threats of an institution which is needed to formulate strategic plans. SWOT analysis of JetBlue Airways: Strengths: 

Visionary and new great supervisory crew.



Lowest cost per accessible seat in the business.



Effective utilization of cutting edge innovation.



Established a solid brand picture as sheltered, dependable, low-passage aircraft

Weaknesses: 

Higher leverage ratio than the industry.



Small fleet of aircrafts.

Opportunities: 

Growing industry.



Positioned in the largest travel market in the USA.



Introduction of new planes targeting mid-fare customers.

Threats: 

Highly competitive market.



Fewer customers to begin with due to the terrorist attack.



Global economic recession.

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IPO Valuation After going through the case study, we identified some questions. In the following section, the analysis of the case study is given:

IPO and Its Significance IPO is an offering to the general public wherein shares of an organization are provided to institutional investors or buyers and as a rule likewise, retail investors. IPO is considered a critical stage in the development of numerous organizations, as it furnishes them with access to the open capital market and expands their trustworthiness and appearance.

Advantages and Disadvantages This is consistently productive for an organization to present more goals. Suppose we see this from the viewpoint of finance. In that case, it will be evident that JetBlue speculators will access a more liquid equity market, which will diminish JetBlue's rate of return given to the capital providers. This will be the explanation for the lower debt to equity ratio. Accordingly, the percentage of debt financing will be expanded. JetBlue can now enjoy the tax advantage given by debt financing. Finally, after going public, the brand worth will increase, and individuals will be more acquainted with the products just as the organization serves services. Then again, going public has a few drawbacks. For example, extra charges, for instance, legitimate expenses, financier expenses, must be given. Moreover, some essential data, such as competitive advantage, will be distributed and known to the contenders. In this way, these points of interest may need to confront if JetBlue chooses to offer its shares to the general investors. After analyzing the various advantages and disadvantages, it can be said that going public is a good idea for JetBlue.

Different Approaches of Share Valuation Various techniques for share valuation have been utilized, such as Market to Book Equity, PriceEarnings Multiple, EBIT Multiple, DCF valuation, and so forth. The administration of JetBlue claimed that they do not pay any dividends to their common stockholders. That is why we pick the Market Multiple Approach and DCF Approach for the valuation of the shares. Every one of these techniques is portraying beneath: 7|Page

P/E Multiple: Under this valuation technique, the P/E ratios of JetBlue airways and its peer companies (AirTran, Frontier, Ryan air, Southwest and WestJet) are low-cost airways have been collected to find out the industry average P/E ratio. The industry average P/E (Trailing) multiple is 22 and for Leading it is 26.50. .

From the case, we came to know that the EPS for the upcoming year 2002 will be $1.20. Based on these data, we calculated the per-share price of JetBlue, which is $36.17.

The EPS for the year 2001 was $1.14. The price per share is $28.60 under the trailing method.

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Market to Book Equity: The chief underwriter of JetBlue airways determined the share value from $22 to $24. After specific changes, each share price has been recalculated, and the adjusted rate was $25 to $26. Under this Market to Book Equity method, the share price of each share would be $17. That is below the estimated range. So, this method will be rejected by the underwriter.

Total Capital Multiplier: The price of share under this specific technique has been determined utilizing minimal cost organizations. Under this strategy, Total Capital Multiplier's median value has been used to figure out the share price of JetBlue, which is $ 27.10. This worth is somewhat low contrasted with the values produced by P/E Multiple.

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EBIT Multiple: Again, under this EBIT Multiple method, the share price under trailing and leading is below the estimated range, calculated by the lead underwriter. So, this method will be rejected.

DCF Valuation: All the fundamental data, except for the constant growth rate, has been given in the case study to ascertain the share price under the Discounted Cash Flow technique. The terminal growth rate has been determined by utilizing the average expected inflation rate for revenue income and the average inflation rate for capital expenditure. To calculate the beta for JetBlue, we choose Southwest airways because it best represents JetBlue.

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We calculated WACC using JetBlue’s capital structure (Equity, Debt, and Preferred Stock). The estimated WACC is 9.56%.

The share price under the DCF valuation model is $30.12. The number of shares is the total of common stock offered in IPO, which is 5.5 million and pre-money outstanding shares, which is practically 35.07 million. We discounted the FCF and terminal value by WACC and ascertained the NPV as $1403.67. We determined the amount of Equity ($1219.81) utilizing the data given in the case. After dividing the value of Equity by the total number of shares, we gain the share price at $30.20.

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Recommendation After breaking down various strategies for share valuation, we can infer that JetBlue Airways IPO ought to have a share price ranging from $27 to $30, beneath the per-share amount of all the techniques discussed above. So, the recommended value is $27 to $30.

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