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Upbeat Traffic Bolsters Azul (AZUL), High Fuel Cost Hurts

·3-min read

The uptick in air-travel demand (particularly on the leisure front) bodes well for Brazilian carrier Azul AZUL, currently carrying a Zacks Rank #3 (Hold). However, escalated fuel costs, a primary headwind, are limiting bottom-line growth.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Factors Favoring AZUL

The gradual improvement in air-travel demand is a huge boon for AZUL. Owing to this tailwind, Azul reported healthy traffic data for June. In the same month, Azul’s consolidated traffic surged 40.1% year over year. To match the increased demand situation, AZUL is expanding its capacity. In the same period, capacity grew 35.8% year over year. Since traffic growth was more than capacity expansion, load factor (percentage of seats filled by passengers) improved 2.5 percentage points (p.p) to 79.3% last month.

Upbeat traffic in Azul’s domestic markets is leading to a rosy scenario on a consolidated basis. In June, domestic traffic and capacity improved 26.3% and 27.6%, respectively. Per Azul’s CEO John Rodgerson, “We experienced strong traffic and unit revenue in June. Our competitive advantages and disciplined capacity allocation continue to give us confidence in the revenue environment going forward”. We expect higher traffic to have aided AZUL’s second-quarter performance. Detailed results should be out on Aug 11. Also, rising demand for Azul’s logistics solutions should boost results.

Key Risks

Escalating fuel costs pose a threat to AZUL’s bottom line. Oil price is moving north, primarily because of supply concerns stemming from Russia's invasion of Ukraine. In the March quarter of 2022, average fuel cost per liters surged 57% from first-quarter 2021 actuals. Fuel price is likely to have been high in the June quarter as well.

Low current ratio (a measure of liquidity) also does not bode well as far as Azul’s liquidity is concerned. In the March quarter, AZUL’s current ratio of 0.43 was lower than the December reading of 0.50. A current ratio of less than 1 implies that a company doesn't have enough liquid assets to cover its short-term liabilities.

Stocks to Consider

In the broader Zacks Transportation sector, investors may consider better-ranked stocks like Kirby Corporation KEX and Golar LNG Limited GLNG, each carrying a Zacks Rank #2 (Buy) at present.

Kirby has an expected earnings growth rate of 278.57% for the current year. KEX delivered a trailing four-quarter earnings surprise of 7.7%, on average. KEX has a long-term earnings growth rate of 12%.

Strong segmental performances are boosting Kirby’s top line. The distribution and services segment is benefiting from increased demand for products and services. Improved performance in the oil and gas, and commercial and industrial markets is driving segmental revenues. Favorable market conditions, such as high refinery and petrochemical plant utilization, and increased volumes from new petrochemical plants in inland marine (within the marine transportation unit), are expected to boost the marine transportation unit’s performance going forward.

Golar LNG delivered a trailing four-quarter earnings surprise of 42.1%, on average. The Zacks Consensus Estimate for GLNG’s current-year earnings has improved 16.7% over the past 90 days. Shares of GLNG have gained 76.2% over the past year.

Golar LNG is benefiting from an improved FLNG (Floating Liquefied Natural Gas) performance. The FLNG unit continues to perform well, aiding GLNG’s top line. Demand for LNG vessels is likely to get stronger owing to the Russia-Ukraine war as the European countries look for gas supplies outside Russia.


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