We have downgraded our recommendation on TAM S.A (TAM) from Outperform to Neutral. The downgrade is backed by declining business travel, rising fuel cost and fluctuating forex. However, the above uncertainties are balanced on the flipside by the anticipation of growing aviation market in 2012.
Brazilian air transport has faced repeated mishaps in the past, which have revealed inefficiencies in the aviation sector. Such inadequacies can affect the company’s flight operations, negatively impacting their results.
The company is exposed to market risks due to changes in interest rates, aircraft lease payments and aircraft insurance. Such variations are anticipated to unfavorably affect its cash flow and future expenses.
Over and above, the potential risk of a fall in customer demand on the backdrop of sluggish global growth, may adversely impact expected revenues and earnings for the upcoming quarters.
However, the above pessimism is tempered by expectation of a growing aviation market in 2012 with a rebound in passenger demand, both domestic and international. In such a scenario, TAM’s presumptions of improved profitability and business growth would be well founded.
Foreseeing a strong and growing market in the near future, the company focuses on establishing partnerships and code-share agreements with market leaders — a strategic move to strengthen its position in a highly competitive market.
Further, TAM continues to emphasize the importance of increasing the number of flights, destinations and connections, thereby striving to boost the company’s profitability and yield. The company’s investments across all market segments, via enhanced economy travels and easy availability of credit for retail products, are noteworthy.
Also, the company’s fleet development and renovation programs, alongside restructuring of old operations over time are commendable. These have consistently increased efficiency while keeping costs strictly under control.
TAM’s strategy of expansion in the number of passengers/route network as well as its demand upsize efforts have given a tight competition to the flight operators, such as AMR Corporation (AAMRQ) and GOL Linhas A (GOL).
TAM has a Zacks #3 Rank, which translates into a short-term (1-3 months) Hold rating.
AMR CORP (AAMRQ): Free Stock Analysis Report
GOL LINHAS-ADR (GOL): Free Stock Analysis Report
TAM SA-ADR (TAM): Free Stock Analysis Report
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