By Shuli Ren
LATAM Airlines‘s (LFL) fourth-quarter earnings could be worse. Domestic market in Brazil was resilient and international routes were on a rebound, but weak Latin American currencies (LATAM is traded in US dollar) and anemic cargo flow means this stock can be pressured. As a result, Raymond James analyst Savanthi Syth and James D. Parker lowered their price target from $21 to $18.
Here are the analysts on LATAM Airlines’s fourth quarter earnings:
Capacity discipline supporting domestic Brazil. Domestic unit revenue (PRASK) in Brazil was +2% y/y in 4Q13 despite an 11% depreciation in the Brazilian real (BRL).
International PRASK was +7% y/y as a result of measures taken to improve profitability, including eliminating unprofitable long-haul routes in 4Q13 and TAM’s codeshare with American effective August 2013. These measures should continue to benefit international operations in 2014. While demand within the domestic Spanish-speaking countries (SSC) remains strong, PRASK in 4Q13 was -6% y/y primarily as a result of weakening currencies particularly in Chile (-8%), Peru (-7%), Argentina (-20%), and Colombia (-11%). Pressure on unit revenue is likely to persist as currency weakness is continuing into 1Q14.
Cargo revenue (14% of LFL’s revenue) declined 11% y/y, significantly below our -6% estimate, as a result of continued demand weakness and elevated competitive capacity. Recovery in the southbound cargo will be dependent on a stronger Brazilian economy. Moreover, competitive capacity is likely to remain elevated in Latin America where demand is stronger relative to other regions due to stagnant global economic activity and a general trade down from air to ocean freight. Thus, we no longer anticipate a modest recovery in LFL’s cargo operations in 2014.
But Citi analysts Stephen Trent, Fernan A Gonzalez and Juliano Navarro are more lenient towards this stock:
LATAM’s US$0.08/ADS net loss included a significant noncash fleet revaluation f/x charge equal to US$0.26. Aside from this, EBIT more than doubled y-o-y, 2013’s normalized EBIT margin of 5.1% met the lower end of management’s guidance while financial leverage declined significantly. Overall, these results are not nearly as severe as the headline loss implies. We would be buyers on any weakness on the back of these results.
Citi has a $19 price target. Shares of LATAM Airlines are trading 2.1% lower to $14.18 at 10AM Eastern time.