JetBlue Airways Corporation (NASDAQ:JBLU) and Southwest Airlines Co. (NYSE:LUV) are the two most active stocks in the Regional Airlines industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

**Growth**

The ability to consistently grow earnings at a high compound rate is a defining characteristic of the best companies for long-term investment. Analysts expect JBLU to grow earnings at a 3.01% annual rate over the next 5 years. Comparatively, LUV is expected to grow at a 11.23% annual rate. All else equal, LUV’s higher growth rate would imply a greater potential for capital appreciation.

**Profitability and Returns**

A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. JetBlue Airways Corporation (JBLU) has an EBITDA margin of 11.61%, compared to an EBITDA margin of 20.83% for Southwest Airlines Co. (LUV). This suggests that LUV underlying business is more profitable. JBLU’s ROI is 15.80% while LUV has a ROI of 20.60%. The interpretation is that LUV’s business generates a higher return on investment than JBLU’s.

**Cash Flow **

Earnings don’t always accurately reflect the amount of cash that a company brings in. JBLU’s free cash flow (“FCF”) per share for the trailing twelve months was +0.43. Comparatively, LUV’s free cash flow per share was +0.12. On a percent-of-sales basis, JBLU’s free cash flow was 2.13% while LUV converted 0.35% of its revenues into cash flow. This means that, for a given level of sales, JBLU is able to generate more free cash flow for investors.

**Liquidity and Financial Risk**

Analysts look at liquidity and leverage ratios to assess how easily a company can cover its liabilities. JBLU has a current ratio of 0.60 compared to 0.60 for LUV. This means that JBLU can more easily cover its most immediate liabilities over the next twelve months. JBLU’s debt-to-equity ratio is 0.32 versus a D/E of 0.38 for LUV. LUV is therefore the more solvent of the two companies, and has lower financial risk.

**Valuation**

JBLU trades at a forward P/E of 9.67, a P/B of 1.56, and a P/S of 0.93, compared to a forward P/E of 12.90, a P/B of 4.13, and a P/S of 1.68 for LUV. JBLU is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

**Analyst Price Targets and Opinions**

Investors often compare a stock’s current price to an analyst price target to get a sense of the potential upside within the next year. JBLU is currently priced at a -19.39% to its one-year price target of $23.93. Comparatively, LUV is -10.9% relative to its price target of $65.42. This suggests that JBLU is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.60 for JBLU and 1.80 for LUV, which implies that analysts are more bullish on the outlook for JBLU.

**Risk and Volatility**

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. JBLU has a beta of 0.59 and LUV’s beta is 1.33. JBLU’s shares are therefore the less volatile of the two stocks.

**Insider Activity and Investor Sentiment**

The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. JBLU has a short ratio of 3.04 compared to a short interest of 2.23 for LUV. This implies that the market is currently less bearish on the outlook for LUV.

**Summary**

JetBlue Airways Corporation (NASDAQ:JBLU) beats Southwest Airlines Co. (NYSE:LUV) on a total of 9 of the 14 factors compared between the two stocks. JBLU has higher cash flow per share, has a higher cash conversion rate, higher liquidity and has lower financial risk. In terms of valuation, JBLU is the cheaper of the two stocks on an earnings, book value and sales basis, JBLU is more undervalued relative to its price target. Finally, FNB has better sentiment signals based on short interest.