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Ting's Jet Blue case


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Ting's Jet Blue case

  1. 1. JetBlue Airways IPO Valuation Ting Xiao
  2. 2. Contents Discounted Cash Flow approach Multiples comparables approach Conclusion 1 2 3
  3. 3. Discounted Cash Flow approach Two-step From year 2010 to infinity From year 2002-2010 WACC
  4. 4. CF(2002-2010) <ul><li>OCF=NOPAT + Depreciation </li></ul><ul><li>Changes in Net WC=Ending Net WC- </li></ul><ul><li>Beginning Net WC </li></ul><ul><li>Total cash of the firm=OCF-CAPEX-Changes </li></ul><ul><li>in Net WC </li></ul>
  5. 5. <ul><li>Then, we get those numbers: </li></ul>CF(2002-2010)
  6. 6. <ul><li>Question: how to determine “g”? </li></ul><ul><li>Choice one: choose reasonable “g” </li></ul><ul><li>Negative or irrational “g” Impossible! </li></ul><ul><li>Choice two: project relative stable “g” </li></ul><ul><li>after year 2010 </li></ul>CF(2010-infinity)
  7. 7. <ul><li>Assumptions to be made: </li></ul><ul><li>Then, let us forecast… </li></ul><ul><li>Finally, we decide g=6.5% </li></ul>CF(2010-infinity)
  8. 8. WACC Pioneer model in low-fare air travel that needs to be followed The most stable one in historical annual growth of low-fare airlines (see Exhibit 8) Like JetBlue, they all belong to low-fare airlines that compare to other groups (see Exhibit 12) Idea: Why choose Southwest?
  9. 9. WACC-9.91% Weights Re Rd Equity: 16,071.99 Debt: 1,842 E/(E+D)=0.9 D/(E+D)=0.1 Rf : 5% Rm-Rf : 5% Beta: 1.10 CAPM: 10.5% Weighted average of cost :6.91% Tax rate:34% Rd : 4.561%
  10. 10. DCF approach <ul><li>Finally, we get those numbers: </li></ul><ul><li>Value of the firm=2,630,100,000 </li></ul><ul><li>Shares outstanding=46,078,829 </li></ul><ul><li>Price per share = $57.1 </li></ul><ul><li>Comment: from this point, even the target </li></ul><ul><li>price at $25 or $26 is still conservative. </li></ul><ul><li>Higher price is achievable. </li></ul>
  11. 11. Multiples comparables approach <ul><li>Several debates: </li></ul><ul><li>Trailing vs. Leading? </li></ul><ul><li>All airlines vs. one group? </li></ul><ul><li>Southwest in particular or not? </li></ul>Low-fare US Airlines Low-fare Foreign Airlines Big 5 Low-fare Regional Airlines Level Of Relevance
  12. 12. Continued <ul><li>My Choice: leading+ one group+ Southwest (why?) </li></ul><ul><li>Numbers are in thousands </li></ul>(Median and Mean) (From Southwest )
  13. 13. Conclusion $24.8 (from Southwest ) $15.1 (from Mean) $24.1 (from Median) $57.1 (from DCF approach) Increase the Price to $28!
  14. 14. Thank You !