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Strong Cargo Revenues Aid LATAM Airlines Amid Currency Woes

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We have issued an updated research report on LATAM Airlines Group S.A. (LTM - Free Report) on Dec 28. While strong cargo and passenger revenues buoy optimism on the stock, currency-related issues raise concerns.

Let’s discuss the factors that are influencing the company’s performance.

The Santiago, Chile-based airline company is gaining momentum on the back of solid demand for air travel, which led to strong passenger revenues. In fact, passenger revenues have increased almost 3% in the first nine months of 2018 and cargo revenues improved 11.8% in the same period. Uptick in the two key top line components bode well for the stock. This factor is likely to boost revenue growth in the final quarter of 2018.

Moreover, we are positive about clearance of the company’s Joint Business Agreements with American Airlines and IAG. Association with two key airline players is likely to enable the company attract additional traffic on key routes. Additionally, the company's prudent cost management is expected to boost the bottom line in the fourth quarter.

Furthermore, LATAM Airlines recently unveiled guidance for 2019, which looks impressive. The company now expects 2019 operating margin in the range of 7-9%, up from 2018 projection of 6.5-8%. Available Seat Kilometres (measure of a flight’s passenger carrying capacity) are projected to grow in the range of 4-6%, the 2018 estimate for the metric’s growth stands at 5%. Similarly, Available Tonne Kilometres are projected to increase in the range of 1-3%, the 2018 estimate for the metric’s growth stands at 4%. Fuel price per barrel is estimated to be $80.

Additionally, we are encouraged by the company’s efforts to reward shareholders in the form of dividend payments. In the first nine months of 2018, LATAM Airlines paid dividends worth $68.2 million, up 28% year over year. The company also has an impressive Value Score of B, which reflects attractive valuation.

Moreover, a glimpse of this Zacks Rank #3 (Hold) company’s price performance reveals that it has outperformed the industry in the past six months. The stock has gained 2.3%, against the industry’s decline of 7.2%.

On the flip side, depreciation of the Brazilian Real and Argentinian Peso is likely to hurt results in the final quarter of 2018. Due to soft demand, LATAM Airlines reduced fleet commitments for the 2018-2021 period by $2.3 billion, reflecting 41% decline from the earlier plan. Despite the current downward trend in oil prices, fuel costs may dent fourth-quarter results.

Stocks to Consider

Investors interested in the broader Transportation sector may consider Air France-KLM SA (AFLYY - Free Report) , Spirit Airlines, Inc. (SAVE - Free Report) and United Continental Holdings, Inc. (UAL - Free Report) . While Air France and Spirit Airlines sport a Zacks Rank #1 (Strong Buy), United Continental carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Air France, Spirit Airlines and United Continental have gained 31.4%, 54.9% and 17.2% in the past six months, respectively.

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