TAM Linhas Aéreas

March 13th, 2011 - no responses

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?

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