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KAI RYSSDAL: Corporate growth can be a double-edged sword. In a live-by-it, die-by-it kind of way. You have to grow to survive. To get more customers and improve profit margins. But you can’t expand too fast. Or you outgrow your ability to deliver for your customers.
There have been two interesting cases in point so far this week. Yesterday, Wal Mart said it’s going to scale back its plans for expansion. Today, discount airline JetBlue reported quarterly profits had come in flat. And that it’s going to make some adjustments.
Marketplace’s Jeff Tyler explains why slow growth sounds so good.
JEFF TYLER: In order to sustain big growth, companies need big profits. But with competition heating up and fuel prices soaring, Jet Blue’s profits have tumbled.
MARISA THOMPSON:“If JetBlue can actually slow their growth, get their debt and cash balance in better order, they’ll be better positioned for the longer term.”
That’s Morningstar equity analyst Marisa Thompson. She says JetBlue carries lots of debt and can’t rely on sustained high consumer demand to balance the books.
THOMPSON:“Wall Street knows in the long run that planes cannot remain this full forever. So they’d rather see JetBlue get its house in order.”
Cutting back on its original target of 20 percent growth in 2007, JetBlue is now aiming for between 14 and 17 percent growth next year. Airline analyst Ray Neidl with Calyon Securities explains why the more modest goal appeals to Wall Street types.
RAY NEIDL:“Sometimes less is more. If you can grow at a lower rate, but produce greater profits, which JetBlue is claiming they’ll be able to do under this scenario, then Wall Street looks at the bottom line profitability. My question is, They’ve got a low operating cost structure already, will they even sustain growth rates at the mid-teens?”
Neidl expects JetBlue may need to lower its growth target even further. And while Marisa Thompson at Morningstar says the company’s long-term prospects are good, she considers the stock to be too expensive at current prices.
Nonetheless, the more modest and possibly more realistic goals were popular with investors, who sent shares of JetBlue flying high today.
In New York, I’m Jeff Tyler for Marketplace.
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