JetBlue shares drop as initial coverage lukewarm NEW YORK, May 7 (Reuters) - Shares of low-cost carrier JetBlue Airways Corp. (JBLU) sank nearly 10 percent on Tuesday after Wall Street analysts initiated coverage with lukewarm recommendations on the stock and one even told investors to sell some of the shares. Unusually, the research reports came from analysts working at three firms that had helped JetBlue sell shares to the public. Wall Street has been under fire by regulators for putting out overly bullish research to win and retain investment banking business, like new stock offerings. Shares of JetBlue had reached an all-time high at $55.15 Monday, more than double their $27 offer price, but sank as low as $49.27 on Tuesday. The shares were off $4.50, or 8.25 percent, at $50.00 on Tuesday afternoon on Nasdaq. UBS Warburg started JetBlue shares at "reduce" given their lofty price, Merrill Lynch rated them a mid-term "buy" on anticipation of strong financial growth, and Morgan Stanley launched coverage at "equal-weight," saying the shares appeared fairly valued based on the 2003 earnings outlook. JetBlue raised $158.4 million in its initial public offering managed by Morgan Stanley (MWD), Merrill Lynch & Co Inc. (MER), UBS Warburg and Raymond James. Two-year-old JetBlue was one of only a handful of U.S. airlines to report a first-quarter profit and had an operating margin of about 17.5 percent due to sharply lower costs than the major carriers. The eight largest U.S. carriers reported net losses totaling $2.4 billion in the first quarter. The carrier has been compared to Krispy Kreme Doughnuts Inc. (KKD), UBS Warburg airline analyst Sam Buttrick wrote in a research note, "But let there be no mistake, JetBlue is an airline." Krispy Kreme, like Jetblue, saw shares jump sharply after its IPO in part on expectations for strong growth potential. Buttrick noted that JetBlue faces risks fundamental to airlines from competition, volatile energy costs and labor. The shares were arguably fairly valued for the IPO and have jumped sharply in part because of the limited size of the deal, brand awareness and lackluster movement in the shares of major carriers, he wrote. Buttrick said that at $54 a share, JetBlue stock appears overvalued at 35 times his fiscal 2003 earnings forecast of $1.55 a share. He set a 12-month price target of $36 a share to $38 a share, 24 times his 2003 earnings forecast. Merrill analyst Michael Linenberg said JetBlue is "arguably the fastest-growing airline in the U.S." in rating the carrier a mid-term "buy." Morgan Stanley said JetBlue has a competitive advantage in worker productivity and fuel-efficient newer A320 jets. "The shares appear fairly valued based on our 2003 earnings outlook, but we believe above-average growth could spur a premium valuation over time," Morgan Stanley said in a note. ©2002 Reuters Limited.