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Module 9: Valuation of Equity Regional Airlines - jetBlue

Module 9: Valuation of Equity Regional Airlines - jetBlue. Michelle Kelly. Background. Low Budget Airline Modeled after Southwest Difference: jetBlue aims to be low cost but high quality. Headquartered in Queens, NY Major Airport: JFK Market Share: 5.1% Serve 84 destinations in 24 states.

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Module 9: Valuation of Equity Regional Airlines - jetBlue

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  1. Module 9: Valuation of EquityRegional Airlines - jetBlue Michelle Kelly

  2. Background • Low Budget Airline • Modeled after Southwest • Difference: jetBlue aims to be low cost but high quality. • Headquartered in Queens, NY • Major Airport: JFK • Market Share: 5.1% • Serve 84 destinations in 24 states

  3. Equity Value • Equity Value = Enterprise Value – Debt • Equity Value = $4,884 – 2,397 • $2,847 • Incorrect way to value equity • Don’t use direct method to value equity because it doesn’t account for fluctuations in the required rate of return for equity • Rate fluctuates based on the company’s leverage • Cannot assume that leverage is constant

  4. Using Analyst Data

  5. Using Analyst Data • Terminal Value = $14 • Earnings per share are lower in comparison to other analyst estimates • Average: 2014 - .70; 2015 - .80 • High end: 2014 – .80; 2015 – 1.05 • jetBlue does not pay dividends to its shareholders • Therefore cannot use divided discount model to value equity

  6. ValueLine Forecasts • Used ValueLine estimates for 2014 and 2015 EPS • Growth Rate for EPS from 2016-2019 = 6.7%

  7. Residual Income Model

  8. Long Term Growth in Residual Income • Used Solver to find growth rate • Set Residual Income model equal to $8.42 stock price given by ValueLine • Calculated g = -21.06%

  9. Long Term Growth in Earnings and Sales • Growth in residual income = -21.06% • Comprehensive Income (2020) = $.94 • Growth in Earnings and Sales = (.94/.91)-1 • 4.06%

  10. Mid-Year Adjustment • Information used to forecast is from December 31, 2013 • Want to get forecast value today in order to compare price • Roll estimate forward to end of March 2014 • Vdec2013 * (1+r)1/4

  11. Mid-Year Adjustment

  12. Sensitivity Analysis • Perform sensitivity analysis to determine how changes in key inputs affect the valuation • If the value of the company greatly increases or decreases when inputs are changed could indicate that the valuation is wrong or that the company is a very risky investment • Current Inputs: • WACC = 7% • Short-term growth = 7.5% • Long-term growth = 2.5%

  13. Sensitivity Analysis – WACC and Short Term Growth Rate Growth Rate Buy WACC Sell Current Market Value = $4,884

  14. Sensitivity Analysis – WACC and Long Term Growth Rate Growth Rate Buy WACC Sell Current Market Value = $4,884

  15. Sensitivity Analysis – A closer Look at WACC Growth Rate Buy WACC Sell Current Market Value = $4,884

  16. Conclusions • Model is very sensitive to WACC • Small increases in WACC cause recommendation to change from buy to sell • Raises concerns about the model and calculated WACC

  17. Questions?

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