Jetblue Airways Ipo Valuation

JetBlue Airways IPO Valuation

There are a couple of ways to conduct an IPO valuation—the Discounted Cash Flow approach and the Multiple Comparables Approach.

Discounted Cash Flow Approach (Exhibit 1)

Using the financial forecasts provided by management and applying it against the discounted cash flow approach, a NPV of -$613M was determined. This was placed against a WACC of 8.2. Growth rates between 2-4% were considered, however, ultimately, a growth rate of 2% was determined due to the price/share's relative proximity to Southwest's share price of $20.69. Although the calculated Price/Share is at $31.6, this can be reasoned through its innovative/cutting edge/high quality airline service and its economy of scale. Under the DCF method, the firm value was determined to be worth $1.281B.

Market Valuation/Relative Valuation Approach (Exhibit 2)

Three types of comparables were used in the Market Valuation/Relative Valuation Approach—EBITDA Multiple, EBIT Multiple, and the P/E Multiple. The comparables used were AirTran, ATA, Frontier, Ryanair, and Southwest. By applying the average EBITDA multiples and EBIT multiples to JetBlue's calculated EBITDA and EBIT, share prices of $10.88 and $2.89, respectively, were determined. These share prices were very far off from the price ranges offered in the deal and did not appear reasonable for a firm with so much growth potential. Since the stock price was not provided, in order to calculate the P/E ratio for JetBlue, the range of $22-26 (initial price range-revised price range) and the Diluted EPS was used to calculate P/E. The P/E ratios ranged from 19 to 23, which is relatively close to the average P/E multiple (19.92) from the comparables. The average P/E multiple lies between the $22 and $23 share price.

Conclusion

According to the DCF model and the market valuation model, I would estimate JetBlue's IPO share price to range from $26-$31, which falls closely in line with the revised IPO offering.

Exhibit 1

2001 2002E 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E

Depreciation 10 18 26 36 45 54 65 75 83 90

NOPAT 18 53 89 120 149 181 215 247 270 292