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Bear of the Day: LATAM Airlines (LFL)

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Low fuel prices had lifted airlines’ stocks last year but the outlook has turned negative this year thanks to overcapacity, terrorist attacks, Zika outbreak currency headwinds and plunging fares. Most airlines have reported disappointing earnings for the recent quarter.  
About the Company
Headquartered in Santiago, Chile, LATAM Airlines Group (LFL) is Latin America's largest airline. They provide passenger services to about 136 destinations in 24 countries and cargo services to about 140 destinations in 29 countries. They have about 50,000 employees and a fleet of 328 aircraft.
The Company’s shares are traded in Santiago as well as on the NYSE in the form of ADRs.
Weak Second Quarter Results
The company reported a net loss of $92 million for the second quarter. Net operating loss of $0.17 per share was much worse than the Zacks Consensus Estimate of a loss of $0.03 per share.
Total revenues plunged by 12.5% due to a 13.7% decline in passenger revenues and a 22.3% decline in cargo revenues. Per management, the revenue decrease continues to reflect a weak macroeconomic environment in South America, particularly in Brazil. They continue to adjust capacity in Brazil to bring it in-line with demand conditions.
The management made no changes to their guidance for this quarter and expect passenger capacity to be relatively flat this year with respect to 2015.
Falling Estimates
Zacks Consensus Estimates for the current and the next year have fallen to $0.17 per share and $0.47 per share, from $0.26 and $0.34 respectively, before the earnings release. The company missed in two out of last four quarters, with an average negative quarterly surprise of 104%.

Settlement of Bribery Charges
In July, the airline agreed to pay more than $22 million in fines to the SEC related to an old bribery case.
The Bottom Line
While low fuel prices benefit airlines’ earnings, they also put pressure on pricing, particularly due to heavy discounting mainly by low-cost carriers. Many airlines expanded capacity in the wake of lower fuel prices which has now led to a fare war,
In addition to Zacks Rank #5 (Strong Sell), the stock has poor Style Scores—“F” for Growth and Momentum and “C” for Value--resulting in a VGM Score of “F”. Further, the Airlines industry is currently ranked 241 out of 265 Zacks industries (bottom 9%). Investors looking to play this industry could look at Copa Holdings (CPA) which currently carries a Zacks Rank #1 (Strong Buy).
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