(TAM) TAM S.A. Analyst Downgrades Shares to Underperform

We recently downgraded our recommendation on TAM S.A (TAM) to Underperform from Neutral.

We believe that the formation of LATAM due to the proposed merger of Lan Airlines and TAM S.A may abruptly push the company into a platform of sturdy competition against tougher rivals. This may affect the company’s profitability. Moreover, the delay in merger due to the Chilean authority, leading to a start-up hindrance involves a negative sentiment for the time being.

Huge air traffic growth coupled with insufficient investments in infrastructure, has increased expenses and created infrastructural crisis for the Brazilian airport authorities. Hence, the authorities have been forcing the airline companies, including TAM, to expand operations to other airports outside Sao Paulo. This in the long run has a lower efficiency and higher operating costs implication for the company.

However, we believe that TAM’s continued fleet development program and proposed merger are conducive toward meeting the escalating air tourism demand, giving a tough competition to its peers like GOL Linhas A (GOL) and LAN Airlines S.A (LFL).

Going forward, TAM’s strategic agreements and partnerships to increase flight destinations and seat/ticket offerings are expected to serve its customers better, thereby raising the company’s market share.

The Air Transport Association (IATA) has again lowered 2011 profitability projection for the airline industry. The present estimate of $4 billion is 78% lower than the 2010 profit level of $18 billion.

The decline in profitability takes into consideration, Natural disasters in Japan, unrest in the Middle East and North Africa and a 20% hike in oil prices, which is likely to impact cost and affect the company’s financials adversely.

Moreover, the risk of appreciation of the Brazilian Real against the U.S. dollar adds up to the peril, as this may impact the company’s profitability due to the foreign exchange losses arising out of the currency translation.

Despite, having some positive factors, the headwinds for the company are overwhelming the positives; hence we have downgraded our recommendation on the stock.

Our Underperform recommendation is supported by a Zacks #5 Rank, which translates into a short-term Strong Sell rating.

TAM S.A., operating through its subsidiaries TAM Linhas Aéreas and TAM Mercosur, is a renowned air transportation service provider, both in the domestic and international markets.

GOL LINHAS-ADR (GOL): Free Stock Analysis Report

LAN CHILE-ADR (LFL): Free Stock Analysis Report

TAM SA-ADR (TAM): Free Stock Analysis Report

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