Brazil is one of the fastest growing emerging economies of the world. Although the government cut its GDP growth forecast for 2024 slightly, the country remains amid a sweet spot in the form of easing inflation and declining interest rates, bolstered by resilient consumption demand. This has prompted bullish views from many market experts about the BRICS member country's 2024 prospects, with a recent report by Bank of America predicting that Brazil's stock market is poised for an 11% rally from current levels.
Given the improving macro backdrop, coupled with forecasts of rising disposable income, now could be an opportune time to bet on growth in Brazil's travel sector. As disposable income rises, people tend to travel more, and travel better. Moreover, corporate travel could also pick up, and aviation is typically a key beneficiary of increased spending here. In fact, scorching demand has pushed airline prices in the country to their highest in over a decade, prompting the Brazilian government to intercede with a deal to lower ticket prices - though airline shares rallied on the news, as the proposal was less stringent than feared.
So, how can investors benefit from these rising macroeconomic tailwinds? Here's a closer look at one Brazilian airline stock that analysts expect to rise more than 60% in 2024.
About Azul SA
Founded in 2008, Azul S.A. ADR (AZUL) is the largest airline in Brazil, based on number of flights and cities served. They offer passenger air transportation through Azul Linhas Aéreas Brasileiras, with services ranging from domestic flights to international connections in Argentina, Uruguay, the United States, and Europe. Notably, Azul occupies the No. 2 spot in domestic passengers market share.
The U.S.-traded shares of Azul currently command a market cap of about $3.63 billion. AZUL gained more than 58% in 2023 - though the shares can currently be bought on the dip. Amid broader headwinds, the stock has pulled back more than 12% already year-to-date in 2024.
So, what's next for this stock over the next 12 months, according to analysts? Let's take a closer look.
Operational Strength
Running an airline is mostly an operational game, and Azul has displayed strength on that front. In the latest quarter, key operating metrics showed improvement from the previous year - including average fare growth of 5.3% to R$587.60, while passenger revenue per available seat kilometer (ASK) also expanded marginally. Moreover, the airline also benefited from cooling energy prices, as its fuel cost per liter fell by 33% yearly to R$4.06.
Overall, operating revenues increased by 12.3% to R$4.9 billion, with a loss per share of R$3.09 accompanied with a 6.8% rise in passenger count to 7.8 million from 7.3 million in the prior year.
Gross debt increased 8% year-over-year to R$23.9 billion, while total available liquidity was up 22.2% to R$6.7 billion. The company's debt obligations are minor until 2027.
Azul's Competitive Edge
Compared to its competitor Gol Linhas Aereas Inteligentes S.A. ADR (GOL), Azul appears to have a strategic edge. It has a diversified aircraft base including Cessnas, ATRs, Embraers E2s, and Airbus widebody, whereas Gol concentrates on the Boeing (BA) 737 alone. This allows Azul to cover a varied set of traffic routes with different densities, at a scale that makes it economically viable. Further, Azul recently expanded its fleet by ordering four more aircrafts from Airbus.
Notably, Azul remains the only domestic airline operator in Brazil that flies in 80% of routes and accounts for 90% of departures. It is also set to bolster its presence in the busy Sao Paulo Congonhas Airport, as it doubled its slots in the airport effective March 2023. This means that in 2024, Azul will report the full-year effect of that slot allocation in the results.
Lastly, another key driver of growth for Azul is its Embraer (ERJ) fleet, which consumes much less fuel than other traditional airplanes - enhancing profitability in an industry that's often about finding small wins around the margins.
Nevertheless, at current levels, Azul is trading at a much lower valuation than GoI, in terms of enterprise value/EBITDA and EV/sales. I find this unjustifiable, as Azul has higher margins and almost the same level of revenues as GoI.
What's the Analyst Forecast for Azul?
Looking ahead, analysts are predicting Azul to comfortably outpace the broader industrials sector in terms of growth. Forward revenue and EBITDA growth for Azul is pegged at 29.10% and 59.82%, respectively.
Analysts have a rating of “Moderate Buy” for Azul stock, with a mean target price of $13.88. This denotes expected upside potential of roughly 63% from current levels. Out of seven analysts covering the stock, 4 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 2 have a “Hold” rating.
