Brazil's TAM Airline Now a Sell

We downgraded Brazil's leading airline, TAM S.A. (TAM - Analyst Report) to Sell from Hold, after the company reported worse-than-expected results in the first quarter, hurt by rising fuel prices and higher operating costs related to the lack of adequate infrastructure in the Brazilian airports.

While growing competition in the Latin American airline industry will certainly affect the company results in the following quarters, TAM also continues to face adverse effects of the accident that occurred at Congonhas airport in Sao Paulo, last July. With global oil prices hitting one record after another and the recent rate hike announced in Brazil, problems only multiply for TAM.

Despite its efforts to increase its international presence and to expand its business segments, TAM will be affected by the emergence of Oceanair and Azul at the domestic level. Even worse, we do not expect the difficulties caused by the complete failure of the Brazilian airports infrastructure to improve in the short-term.

We have a target price of $18 on TAM, which represents a valuation of between 10x and 10.5x our 2008 P/E, with a huge discount to the industry median due to the specific problems in the Brazilian airline industry.

Read the full analyst report on TAM