I bought Brazilian TAM in May last year at 13,50 USD, the stock trades at 20,96 today (PE 8,15)
Although these are uncertain times to buy shares of air companies, TAM is worth looking into.

Last week the merger between LAN Chile and TAM was formally approved in Brazil, creating LATAM, making it the 11th biggest company in number of passengers, bigger than Qantas, Japan Airlines and China Air:

The merger gives many synergies, not in the least when it comes to cargo.
But let’s not forget what is ahead:

1. LAN has currently 63 planes in the air and 102 planes on order.
2. TAM has currently 144 planes and 124 on order (of which  17 Airbus A350-900 and 10 Airbus A350-800)
3. UK design firm Priestmangood is doing a redesign of aircraft interior on TAM’s entire fleet, including the upcoming Boeing 777s and A350s
4. Last week TAM announced it will buy Brazilian local carrier TRIP.
5. Profits of TAM rose 7,9% compared to last year (dividend yield of 4,1% on the stock)
6. In 2010, the demand for domestic Brazilian flights increased by 23.5%, according to the Brazilian National Civil Aviation Agency (ANAC). TAM estimates that in 2011, demand for commercial flights in the Brazilian market will grow by between 15% and 18%.
7. And most interesting, Portugal will have to sell state-owned TAP in May.  The new LATAM is looking into acquiring 39% of TAP (it’s flights to Brazil, TAP is currently the air company with most passenger movement EU-BR) and eventually increasing its share to 49%.  Lufthanse has also asked for the details of TAP’s privatisation and is interested in buying the remaining 51%.

End of May more news on the TAP deal. Will be determining to TAM remaining a Star Alliance member.  There is a fierce battle going where both Star Alliance (TAM is Star Alliance) and Oneworld (LAN is Oneworld) are both courting LATAM.

I tend to bet that Petrol will fall back to 100 US$ sooner then expected, yet the impact on airline profits is fierce.  Remember:  Brazil does not allow airlines to pass on fuel surcharges to their domestic customers, so companies like TAM, Azul and GOL will simply have to absorb the added cost and watch their margins suffer. To which extent would this already be discounted into the current 21 USD price of TAM?  Currently TAM is still trading at a ~9% discount to the implied stock priced based on the share swap ratio of 1 LFL:0.9 TAM, an opportunity?

Tags: LATAM, TAM shares

Despite the record high currency, Brazil clocks a trade surplus of 1,19 billion US$ in February.
Meanwhile China’s trade balance goes in the red and so the United States trade balance keeps further sinking in the red.

Just look at the sinking trade balance with the OPEC and you understand where the problem of the US sits.

Meanwhile Petrobras keeps pumping up every day more (overtaking Exxon Mobile soon) and more petrol, exporting every day more petrol and gas.

Don’ t be fooled by the raising petrol prices (which are here to stay for a while) though, China Air is dropping it’s landing gear as you can see  in the dropping prices of cupper and rubber.

Market expectations for the Brazilian trade surplus have been highered from US$ 11,45 billion to US$ 13 billion by the end of 2011.  No wonder Obama wants to court the Brazilians, he’ll pay heavy dancing Samba in Brazil though.

An excellent piece on Brazil’s balance sheet, petrol and the Brazilian Reais in the Financial Times:

“By using our return assumptions, we calculate that the average return for the assets of Brazilian held abroad is 6.7%, while the return to assets held by foreigners in Brazil is 16.5%. This large difference is basically driven by the fact that a large portion of the foreign assets held by Brazilians, 50.2%, are low- yielding reserve assets held by the BCB. …Specifically, for BRL at 1.687 both methods imply a constant growth rate of the trade balance of 23.2% from current levels.”

“That’s 23 per cent annually. This isn’t unheard of for Brazil, as Nomura points out.”

Read also part 2 on the Brazilian Real:

“Thus while Brazil’s growing negative net asset position will make future export performance key to maintaining or improving current levels of the currency, the structure of the assets owned by foreigners, mostly denominated in local currency and with “state-dependent” returns (direct investments and equity equaling US$822 billion against US$221 billion in fixed income securities) means that while valuation for BRL may already be aggressive (if not “bubble-like”), we would argue that our results show that the market’s perception of credit risk from this perspective may be too high at present. This last difference is key because it means that any eventual crisis will likely be resolved by changes in the level of BRL and asset prices, and not become a debt crisis. Like many European countries are currently discovering, if economic perspectives disappoint, liabilities denominated in the local currency pass on the risk to the holder of the asset through lower exchange rate values.”

Tags: brazil trade balance

Carnaval has just ended and all eyes are already on the next major event: Obama’s visit to Brazil on March 19th and 20th.

All the focus is on the 2014 World Cup and the 2016 Olympics, but Brazil will have many occasions before that to flex its muscles.   Obama’s visit is one of them. David Rothkopf of Foreign Policy summarized in his article of today why Obama’s visit goes far beyond protocol.

Of course, Obama is heading to Brazil (and the rest of Latin America) with mainly an agenda focused on trade.  He’ll spend a day in Brasilian and one in Rio.  And he is bringing the whole family and will spend a day visiting Cristo, the Sugerloaf, the beach.  Read: frontcover allover with his daughters and wife dancing Samba. The governor of Rio, Sérgio Cabral claims he will accompany Obama  on a tour of a local favela, and show off one of the UPPs through which the government is pacifying the favelas.

The timing couldn’t have been better for Brazil.  The BCC recently released a survey that shows that out of any country in the world, Brazil has gained the most popularity in the past year. In 2010, 49 percent of people polled in 27 countries said Brazil has a positive influence in the world, and the number of people who think this way is increasing. People in the US, Canada, Brazil, Chile, Peru and Mexico, as well as Western European countries, were the most positive in their views of Brazil; in China, there were more evenly mixed views, and in Germany, more people believed Brazil has a negative influence.  No word on Belgium.

And this positive reputation doesn’t just come from the upcoling Worldcup and Olympics.  It is mostly due to the excellent political, economic and social performance of the country as you can read in this article from AS-COA.

The new president is well-perceived as she took power  (The Guardian named her as one of the 100 most inspiring women today), Brazil’s robust economy, the expansion of the middle class and poverty reduction, Bolsa Família, and the government’s foreign policy are receiving thumbs up worldwide.

But the trip is not all PR.  One of the questions for Obama is: will he support the candidacy of Brazil to be a permanent member of the U.N. Security Council?
Brazil’s efforts to gain the permanent seat in the Security Council are hot.  But Obama already raised the support for India’s candidacy.   There are four countries that are regularly mentioned for such an upgrade in their status-referred to as the G-4, they are India, Brazil, Germany and Japan. The U.S. has long ago publicly supported Japan’s candidacy. The India statement now has Brazilians thinking their time has come.

Many Brazilians have already clearly said that if Obama does not  explicitly express support for Brazil’s candidacy for a permanent Security Council seat, the trip will be a failure. Some have gone further. During recent high-level Brazil-U.S. meetings, the message was delivered by the visiting Brazilians that should such support not be forthcoming, some in the Brazilian government might be inclined to re-examine how vigorously Brazil supports other U.S. objectives like strengthening the effectiveness of the trade deals Obama wants to put in place.  Let’s be honest, Obama needs Brazil more trade-wise than vise versa.  Or do you think Obama underwrites the Brazilian drilling inspired by an act of altruism?   Fortune just published today this article in which Brazilian Petrobras is posed to surpass Exxon Mobile and become the largest publicly traded oil company in reserves and production worldwide.  Obama also knows that Brazil will touch upon the currency matter where the dollar is undervaluated against the Brazilian Reais.

There are also rumours that Obama will announce the end of the tourist visa for Brazilians to visit the United States.  This would have massive impacts on the number of Brazilians traveling to the US.  Also here Obama is not altruistic, the man knows well enough what amount of “iPad buying” the lifting of the tourist visa will result in.  I guess that’s why Brazilian TAM is investing 3,2 billion US$ in new airplanes.  Some people believe Obama Obama will even perform a public speech to Brazilians as he did in Germany in 2008.  Let’s see, no man on the planet is better placed than Obama to make Brazilians know just how much they matter to the rest of the world.

Interesting weeks ahead, we’ll give our impressions.

PS and we completely understand why Michelle doesn’t let her husband travel to Brazil alone after he checked out the butt of 16 year old Brazilian delegate Mavora Taveras in 2009.

Tags: obama in brazil

3 articles of interest of last week:

1. Brazil’s Per-Capita Income Surpassed Mexico In 2010 – WSJ:

Mexico, Latin America’s No. 2 most populous country and the region’s second-biggest economy, has traditionally been able to take solace in having a higher per-capita income than its bigger cousin, Brazil.

But that may have changed, based on gross domestic product data recently released by each country, as the South American economy benefits from faster economic growth and its currency strengthens.  GDP per capita reached $10,814 in 2010.

2. Rio de Janeiro prime office rents overtake new York rates for first time (Bloomberg):

The annual cost of renting a square foot of prime office space in the Brazilian city rose 47 percent last year to $120, or $5 more than in Midtown Manhattan. Rio de Janeiro advanced to fourth from 13th in a global ranking of prime office markets, coming after Hong Kong, London and Tokyo, Cushman said.

“Very high demand and a lack of supply” powered the gains in Brazil’s second-largest city.  London prime rents rose 27 percent last year to $233 a square foot, the Cushman study showed. That contrasts with an average of 1 percent growth across Europe. New York advanced to fifth in the global ranking from sixth a year ago after prime rental costs in Midtown Manhattan rose 10 percent to $115 a square foot, Cushman said.

3. Brazil at heart of Google’s Latin America strategy (Reuters):

Brazil is on the way to becoming Google Inc’s sixth-largest global market, Chief Executive Eric Schmidt said on Friday as the company opens new offices in the fast-growing Latin American region. The world’s No. 1 Internet search company saw its revenue in the region surge last year on the back of brisk economic growth, showing growth of 50 percent to 100 percent last year.

“That means you’re almost doubling (revenue) every year,” Schmidt told Reuters in the company’s offices in Buenos Aires. “That’s a lot due to the effect of the economic recovery from a global recession, but also to the development of broadband and the development of the electronic commerce.”

Latin America accounts for 2 percent to 3 percent of the California-based company’s revenue, which totaled $29.3 billion last year, mostly from its business in the United States and Europe. But Schmidt said the region’s relatively modest share should grow fast. ”It will become a much larger percentage very quickly. Brazil is, for example, already on its way to becoming our sixth-largest country in revenue,” he said

Tags: gdp brasil, google brazil, rio office

The new facility will occupy 500 thousand square meters with 220 thousand square meters to be used for environmental preservation.
The Joinville plant will build engines and automotive components for GM’s Automotive Industrial Complex in the city of Gravataí (Rio Grande do Sul) and the Rosario Automotive Industrial Complex in Argentina. The plant will be able to make 120.000 engines and 50.000 cylinders per year.

The company says it will have a system that allows engines to be tested without using fuel, eliminating contaminants inside the building.
GM didn’t say what engines the factory will build. The company’s sales have been rising to record levels in Brazil’s fast-growing market.

Joinville industry keeps growing at a fast pace; recently Azul announced new direct flights from Sao Paulo to Joinville.

Tags: GM Joinville