Jetblue Airways Ipo Valuation Case Study Solutions

 

# Net income applicable to common stockholders was $21,567 thousands ( Exhibit 3)# P/E ratio of Southwest Airlines was 49.3(Exhibit 5)# Beta of Southwest Airlines was 1.10 (Exhibit 5)# Yield to maturity of Southwest Airlines debenture was 8.68% (Exhibit 6)# Trailing EBIT Multiple of Southwest was 18.6 (Exhibit 7)# 2001, Southwest revenue growth was 12% (Exhibit 8)# Tax rate is 34% (Exhibit 13)# 2001, EBIT is $27 million (Exhibit 13)

Data source:

Actual numbers for 2001 are from company annual reports. Estimates for 2002 arefrom Valueline when available, otherwise consensus analyst estimates are used. All stock pricesare quoted as of December 31, 2001. Ryanair figures are based on the respectiveAmerican Deposit Receipt prices. Westjet figures are in Canadian dollars. 1 US dollar = 1.5870Canadian dollars as of March 31, 2002. The calculation procedure for the valuation multiples isdefined in the lower panel based on the numbered variables defined in the upper panel.

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JetBlue Airways IPO Valuation

(Initial public offering)

Question1). What are the advantages and disadvantages of going public?

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AnswerThe Advantages of Going Public (Reasons to go public)

- From an operation perspective, going public gives a company a large pot of cash, which it canuse to increase itscompetitiveness by increasing its asset base, improving marketing, hiringqualified staff, funding more product research,and so on.- From a financing perspective, going public lowers a company's cost of capital. The main reasonis that investors arewilling to pay a higher price for a company's stock than if the shares had been privately issued, since they can easily sellthe shares. This premium can reduce the cost of capital by several percent.- New equity drastically lowers the proportion of debt to equity that is recorded on the corporate balance sheet, whichis looked on with great favor by lenders. With the new equity in hand, acompany can then ask lenders for a larger amountof debt, which they will be likely to lend until theamount handed over results in a significantly higher debt/equity ratio.

The Disadvantages of Going Public (Reasons not to go public)

- One of the best reasons for not going public is its cost. A company conducting a small offeringwill find that theproportional cost of obtaining equity funding is extremely high, since theunderwriter will charge a higher fee as apercentage of the amount raised in order to cover its costand still earn a profit on the transaction.

Exhibit TN3 JETBLUE AIRWAYS IPO VALUATION JetBlue Stock Valuation Figures in millions (except prices and multiples) 2002 2003 2004 2005 2006 2007 2008 2009 2010 EBIT 80 134 181 226 274 326 375 410 443 NOPAT 53 89 120 149 181 215 247 270 292 Depreciation 18 26 36 45 54 65 75 83 90 Capital expenditures 290 328 345 310 326 342 299 157 132 NWC investment 30 30 33 31 34 36 34 24 23 Free cash flow (250) (243) (222) (148) (124) (98) (11) 172 227 Discount rate 9.7% Discounted value of forecast period ($659) Book debt (2001) $375 Shares outstanding (Footnote 5) 35.1 Terminal value estimates Constant growth model Growth Price TV(2002) Steady state cash flow (2011) TV (2010) Growth rate (Exp infl.=TBond yield less 2% real rate) 3% $10 1,381 215 3,186 Growth rate (Exp Nom GDP growth=5%) 5% $13 1,491 163 3,441 Trailing EBIT Multiple Multiple Price TV(2002) TV (2010) Average (All airlines) 3.9 ($8) 755 1,742 Median (All airlines) (2.9) ($45) (553) (1,277) Average (Low fare) 8.9 $19 1,713 3,953 Median (Low fare) 12.7 $40 2,444 5,641 Ryanair only 38.5 $181 7,376 17,022 Southwest only 18.6 $72 3,567 8,232 Trailing EBITDA Multiple Multiple Price TV(2002) TV (2010) Average (All airlines) (17.3) ($143) (3,994) (9,216) Median (All airlines) 6.9 $16 1,588 3,664 Average (Low fare) 9.2 $31 2,122 4,897 Median (Low fare) 8.1 $24 1,876 4,329 Ryanair only 26.4 $144 6,104 14,085 Southwest only 13.4 $59 3,099 7,151 Total Cap M/B Multiple Multiple Price TV(2002) TV (2010) Average (All airlines) 1.9 $37 2,325 5,365 Median (All airlines) 1.2 $14 1,515 3,497 Average (Low fare) 2.6 $65 3,302 7,620 Median (Low fare) 2.9 $73 3,583 8,269 Ryanair only 4.0 $112 4,973 11,475 Southwest only 2.9 $73 3,583 8,269 Multiple-based valuation estimates Leading EBIT Multiple Multiple Price Average (Low fare) 12.2 $17 Median (Low fare) 13.9 $21 Ryanair only 30.3 $58 Southwest only 14.3 $22 Trailing EBIT Multiple for recent IPOs 2001 EBIT $26.8M Multiple Price Ryanair 8.5 ($4) easyJet 11.6 ($2) WestJet 13.4 ($0)

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