We recently upgraded our recommendation on Tam S.A (TAM) to Neutral from Underperform.
The upgraded rating is backed by the recent merger approval of LAN Airlines (LFL) and TAM to form a new company called LATAM Airlines Group, which is expected to increase the number of flights and routes, thereby benefiting passengers and cargo customers of both companies.
Moreover, the company has improved its financial results with net income of $37.9 million, up from a loss of $98.2 million in 2Q10 and a 16.9% rise in net revenue year over year. The recent load factor record of 79.6% in international flights and 66.6% in the domestic market, implies that the company is able to foresee a better demand growth.
However, rise in operating cost and lower efficiency of the airline companies in Brazil due to insufficient airport infrastructure appear a bit disconcerting for the stock. Furthermore, on the backdrop of significant international competition in the airlines industry, the potential risk of fall in customer demand over the company’s route network could adversely impact the expected revenues and earnings for the coming quarters.
In order to resist such unexpected negatives, the company has been continuing its fleet development and renovation programs along with restructuring old operations to keep costs appropriate with its business model while maintaining profitability and commitment to safety and quality.
In addition, the company entered into strategic partnerships and agreements to increase flight destinations; to create provision for higher number of seat offerings and easy availability of air tickets. This is expected to raise market share and revenue going forward on the backdrop of stronger demand for air transport, resulting from recovering market conditions and growth in the emerging economies.
However, we remain on the sidelines based on the potential adversity of the rise in fuel prices and appreciation of the Real due to currency fluctuation, which are also anticipated to impact profitability going forward.
TAM S.A., operating through its subsidiaries TAM Linhas Aéreas and TAM Mercosur, is a renowned air transportation services provider, both in the domestic and international markets. TAM competes directly with its peers, such as AMR Corporation (AMR) and GOL Linhas A (GOL).
Tam S.A has a Zacks #3 Rank, which translates into a short-term Hold rating (1-3 months).
