Why JetBlue Airways Corp. Shares Crashed on Tuesday

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What happened

Shares of JetBlue Airways (NASDAQ:JBLU) closed 10.2% lower on Tuesday, following the release of the airline operator’s second-quarter results. The report itself was solid, but investors came into the release with high hopes for an even stronger performance.

So what

JetBlue’s second-quarter operating revenue rose 5% year over year to land at $1.93 billion. Adjusted earnings fell 39% lower, stopping at $0.38 per diluted share. Analysts had been expecting earnings near $0.36 per share on sales of roughly $1.93 billion. At worst, you could call it a mixed quarter.

But analyst firm J.P. Morgan had recently advised its clients that JetBlue was likely to deliver an impressive slate of next-quarter guidance, and the company fell far short of that implied promise. The bank expected a fresh round of fare increases to pave the way toward solid results in the coming quarters. Instead, JetBlue’s management painted a picture of flattish increases in revenue per seat and modest capacity growth.

White passenger airplane flying through dark storm clouds and lightning strikes.

Stormy skies ahead for JetBlue? Image source: Getty Images.

Now what

Rising fuel prices weigh heavily on the company’s expansion ambitions. In the longer term, the company hopes to widen its margins thanks to disciplined cost controls — but that effort will take a while and is swimming upstream until fuel prices stabilize again.

The stock has now plunged 24% lower over the past 52 weeks, and JetBlue is trading at a huge discount compared to the price-to-earnings or EV/EBITDA ratios of its industry peers. In short, the stock is priced for disaster even though revenue is on the rise and JetBlue is taking steps to get its bottom-line profits back on track. This knee-jerk reaction to modest guidance targets seems wrong to me.

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool recommends JetBlue Airways. The Motley Fool has a disclosure policy.