RICHARD CERVONE
CO-MANAGER
PUTNAM INVESTORS FUND

STOCK: JetBlue Airways Corporation (Nasdaq: JBLU)
PRICE: $13.23 (as of 4 p.m. Friday)
52-WEEK RANGE: $11.34-$16.85
MARKET CAPITALIZATION: $2.09 billion

Richard Cervone is an investment manager with Putnam Investments and currently helps manage the Putnam Investors Fund. JetBlue operates more than 340 flights each day. The airline industry has suffered in recent years, with many established carriers struggling to survive amid rising fuel costs. JetBlue has weathered the storm better than most, but its share price has still fallen. Mr. Cervone explained to David Dalley of The New York Sun why he believes now is the time to buy.

Why is JetBlue interesting?

Well, what we have here is a classic example of how a stock can get undervalued. It’s a young company, it’s growing rapidly, it made a solid profit two years ago, and its margins have fallen even as oil costs have risen. Meanwhile its top line [revenue] keeps growing at 30%. Fuel costs are high right now, but that’s a cyclical situation. The problem is that because of all the excess capacity in the industry, airlines haven’t been able to pass the cost hikes onto consumers.

What do you mean when you say excess capacity?

Oversupply – too many seats, too many carriers on the same routes. It’s a supply and demand imbalance. So if one carrier tries to pass on the fuel cost by increasing fares, they price them selves out of the market. Margins are very tight right now.

So how does all this benefit JetBlue?

Well, with fuel being so high and the legacy airlines reporting some big losses, the industry was forced to a crisis point, and the only solution was to reduce capacity. So fares started rising from about the middle of last year. Supply and demand came more into balance. RASM – revenue per available seat mile – has been increasing. What we think will happen over the next, say, two to three years is that either fuel costs will fall or ticket prices will increase further, or both. The point is that volatility in the oil market won’t be an issue any longer, and the underlying strength of the company will drive the value up.

What makes you think that these factors haven’t already been priced into the JetBlue share price?

The market is just very nervous about oil right now. No doubt there are some investors out there who think like us, but most want to wait and see some evidence, so a lot of this stuff – a lot of this potential – isn’t factored into their estimates. Our focus is on simply valuing the business and on valuing cash flows. We don’t try to predict the timing, we try to identify value.

The thing about JetBlue is that you’ve got a company with great growth prospects but very depressed profits. Fundamentally, it’s a very strong company. Operating costs (excluding fuel) are below most of the competition. The company also has a great product – people love flying JetBlue. It’s a classic situation of a long-term winner that happens to be undervalued right now because of a very difficult industry-wide situation.