JetBlue Airways IPO Valuation

March 29, 2018 | Author: Orrathai Buanual | Category: Initial Public Offering, Stocks, Cost Of Capital, Preferred Stock, Discounted Cash Flow


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JetBlue Airways IPO Valuation (Initial public offering) Synopsis and Objectives This case examines the April2002, decision of JetBlue management to price the initial public offeringof JetBlue stock during one of the worst periods in airline history. The case outlines JetBlue’s innovativestrategy and the associated strong financial performance over its initial two years. The task is to valuethe stock and take a position on whether the current $25±$26 per share filing range is appropriate.The case is designed to showcase corporate valuation using discounted cash flow and peer-companymarket multiples. ขขขขขขขขขขขขขขข ขขข ขขข ขขขขขขขขขขข ขขขขขขขข Data from Case # Exhibits 1 through 4 provide selections from JetBlue's IPO prospectus. # The initial price range for JetBlue shares communicated to potential investors was from $22-$24. # The 5.5 million shares planned in the IPO. # Management had recently filed an increase in the offering price range to $25 - $26 # Exhibits 5 and 6 provide financial data on Southwest Airlines from Value Line and Mergent. # Exhibit 7 shows current market multiple calculations for U.S. airlines. # Exhibit 8 provides historical growth rates of revenue and equipment for low fare airlines. # Ryanair, WestJet, and EasyJet had gone public with trailing EBIT multiples of 8.5 times, 11.6 times a13.4 times, respectively, and first day returns of 62 %, 25%, and 11%, respectively. # Exhibit 10 contains a selection of recent analyst and reporter comments. # Exhibit 11 provides expected aggregate industry growth and profitability forecasts from the Value LineInvestment Survey. # Exhibit 12 shows the share price performance of airlines over the past eight months. # Current long-term U.S. Treasuries traded at a yield of 5%, short-term rates were at 2%. # The market risk premium was estimated to be 5%. # Exhibit 13 provides a financial forecast for the company based on the JetBlue management team's forecast of aircraft acquisitions. # Common stock offered was 5,500,000 shares (Exhibit 1) # Common stock estimated to be outstanding immediately after this offering was 40,578,829 shares(Exhibit 1) # Long-term debt was $290,665 thousands ( Exhibit 2) # Deferred credits & other liabilities was $10,708 thousands ( Exhibit 2) # Convertible redeemable preferred stock was $210,441 thousands ( Exhibit 2) # Total common stockholders'equity(deficit) was $32,167 thousands ( Exhibit 2) # Preferred stock dividends was $16,970 thousands ( Exhibit 3) # 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 are from Valueline when available, otherwise consensus analyst estimates are used. All stock prices are quoted as of December 31, 2001. Ryanair figures are based on the respective American Deposit Receipt prices. Westjet figures are in Canadian dollars. 1 US dollar = 1.5870 Canadian dollars as of March 31, 2002. The calculation procedure for the valuation multiples is defined in the lower panel based on the numbered variables defined in the upper panel. ขขขขขข ขขข ขขขขขข ข.ขขขขขข JetBlue Airways IPO Valuation (Initial public offering) Question 1). What are the advantages and disadvantages of going public? (คคคคคค คคค 1 คคค ค. คคคคค Jet Blue คคคคคคคคคคคคคคคคคคคคคค ? .) Answer The Advantages of Going Public (Reasons to go public) - From an operation perspective, going public gives a company a large pot of cash, which it can use to increase itscompetitiveness by increasing its asset base, improving marketing, hiring qualified staff, funding more product research,and so on. - From a financing perspective, going public lowers a company's cost of capital. The main reason is 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, a company can then ask lenders for a larger amountof debt, which they will be likely to lend until the amount 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 offering will find that theproportional cost of obtaining equity funding is extremely high, since the underwriter will charge a higher fee as apercentage of the amount raised in order to cover its cost and still earn a profit on the transaction. - Loss of control is possible unless the owner has retained a large proportion of corporate stock or unless a separateclass of super voting stock has been established that gives the owners additional votes at shareholder meetings.Otherwise, outside investors can either buy up shares to create large voting blocks or band together to create the same result. - Information disclosure is yet another problem. In addition to the expense of having additional accounting staff to organizeand report this information, there is the problem of disclosing information to a company's competitors, who only need togo to the SEC's web site to access all required reports filed by the company. - Another issue is the constant pressure from investors and analysts to show improved results every quarter. Investorscan attempt to unseat the management team by approving a different Board of Directors if they feel that growth rates arebelow their expectations. -The management team must understand that it now exists not to serve themselves, but to serve the investing public.This major shift in focus calls for the elimination of unusually high compensation packages to the managers, as well as acommitment to increasing shareholder value over other objectives that may have been in vogue at the company prior togoing public. More Learning - How the company should be prepare for the IPO? Question 2). What different approaches can be used to value JetBlue's shares? (คคคคคค คคค 2 คคค ค. คคคคคคคคคคคคค IPO คคคคคคคคคคคค Jet Blue คคคคคคคคคคคคค ? คคคคคคคคค คคคคคคค คคคคคคคคคคคคคคคค ? คคคคคค 3 คคคคคคคคคคคคค IPO คคคคคคค DCF Discounted Cash Flow Method คคคคคคค คคคคคคคคคคคคคค Cash Flow,คคคคคคคคคคคคคคคคคค, คคคคคคคคคค.) Answer 1). Dividend Growth Models Refer exhibit 1, selections from Jetblue prospectus, we have not declared or paid any dividends on our common stock.We currently intend to retain our future earnings, if any, to finance the further expansion and continued growth of our business.. 2). The Corporate Value Model (By Discounted Cash Flow Method) FCF = NOPAT+ Depreciation - CAPEX – NWC Terminal Value = FCF Steady State / (WACC - g ) = Vcompany at t=n V = FCF1/ (1+WACC)1+ FCF2/ (1+WACC)2+ «..+FCFn/ (1+WACC)n+Terminal Value V=D+E Note : See WACC and Table 1 Offering Price =$25.59 3). Compare with same industry , market or competitor (Benchmark ) Price / Earning Ratio (P/E) P/E ratio of Southwest Airlines was 49.3(Exhibit 5) Net income alicable to common stockholders was $21567 thousands Exhibit 3, Common stock offered was 5,500,000 shares (Exhibit 1) Common stock estimated to be outstanding immediately after this offering was 40,578,829 shares (Exhibit 1) Offering Price =(21,567,000*49.3) / (5,500,000+40,578,829) =$23.07 EBIT MultipleEBIT Multiple = [Book debt + IPO price * Post IPO shares outstanding] / [Most recent year's EBIT]Lonterm debt was $290665 thousands Exhibit 2, Deferred credits & other liabilities was $10,708 thousands ( Exhibit 2) Convertible redeemable preferred stock was $210,441 thousands ( Exhibit 2) Trailing EBIT Multiple of Southwest was 18.6 (Exhibit 7) 2001, EBIT is $27 million (Exhibit 13) Offering Price =((18.6*27,000,000)-(290,665,000+10,708,000)) / (5,500,000+40,578,829) =$4.57 JetBlue Airways IPO Valuation (Initial public offering) Question 3). At what price would you recommend that JetBlue offer their shares? Answer We recommend offering price is $25.59for JetBlue share. คคคคคคคคคค คคค 4 คคคคคค Terminal Value คคคค 2010 คคคคคคคคคคค Dividend Growth Model คคคค Multiple - P/E, P/B JetBlue Airways IPO Valuation Summary of WACC Calculation for JetBlue Airways, and Segment Worksheet Corporate MV asset weights Bond rating Pretax cost of debt 7.41% Kd = Yield to maturity of Southwest Airlines debenture (Exhibit 6) Tax rate 34% After-tax cost of debt 4.89% Kd(1-t) Dp 169,700 Preferred stock dividends was $16,970 thousands ( Exhibit 3) Pp 210,441,000 Convertible redeemable preferred stock ( Exhibit 2) Cost of preferred stock 8.06% Kp = Dp / Pp Equity beta 1.10 Refer Beta of Southwest Airlines was (Exhibit 5) Rf 5.00% Current long-term U.S. Treasuries traded at a yield of 5% RM 10.00% Rm = Rf + Rp RM-Rf 5.00% Market risk premium is 5% Cost of common stock 10.50% Ke = Rf + F*(Rm-Rf ) Weight of debt 17.6% Debt =301,373(Book value, Long term debt, Exhibit 2) Weight of preferred stock 12.3% Preferred stock=210,441(Book value, Exhibit 2) Weight of common stock 70.1% Common stock=1,198,049(App. Market =46,078,829*$26) WACC 9.21% WACC = Kd(1-t)*Wd+ Kp*Wp+ Ke*We WACC = Kd(1-t)*D/(D+P+E) + Kp*P/(D+P+E)+Ke*E/(D+P+E คคคคคค : คคคคคคคคคค
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