On Nov. 14, 2024, Azul S.A. (AZUL) reported lower-than-expected third-quarter 2024 results, wherein the company’s bottom line and top line lagged the Zacks Consensus Estimate.
Adding to the bearishness, Azul has lowered its 2024 capacity expectation. The company now expects its full-year capacity to increase by almost 6% (prior view: up 7%) from 2023. The change in expectation of capacity growth is due to the reduction in AZUL’s domestic capacity due to the devastating floods in Rio Grande do Sul, the temporary reduction in AZUL’s international capacity in the first half of the year and manufacturers’ new aircraft delivery delays.
AZUL shares have plunged 9.7% following its Nov. 14 earnings release.
The lower-than-expected results naturally raise the question: Should investors buy AZUL stock now following the dip in share price? A more in-depth analysis is needed to make that determination. Before diving into AZUL’s investment prospects, let’s take a glance at its quarterly numbers.
Snapshot of AZUL’s Q3 Results
Azul incurred a loss of 32 cents per share in the third quarter of 2024, wider than the Zacks Consensus Estimate of a loss of 10 cents.
Find the latest EPS estimates and surprises on ZacksEarnings Calendar.
Total revenues of $925.1 million lagged the Zacks Consensus Estimate of $953.2 million. Despite lagging the consensus mark, AZUL’s top line benefited from a healthy demand environment and robust ancillary revenues in the third quarter of 2024. With more people taking to the skies, Azul’s passenger revenues, contributing 92.8% to the top line, grew 4% year over year.
Cargo revenue and other grew 8.8% year over year owing to improved performance of AZUL’s ancillary revenues and solid domestic demand for its cargo solutions and exclusive network, and the partial recovery of its international operation. These were, however, partially offset by the reduction in AZUL’s domestic capacity in RioGrande do Sul state.
Consolidated traffic, measured in revenue passenger kilometers (RPKs), rose 4.3% (up 8.4% domestic but down 8.4% on the international front) year over year. Consolidated available seat kilometers (ASK), measuring an airline's passenger-carrying capacity, increased 3.7% from the year-ago quarter, with a 6.8% rise in domestic capacity and a 7% decline in international capacity. Since traffic outpaced the capacity expansion, load factor (percentage of seats filled with passengers) grew 0.5 percentage points to 82.6%. Our estimate is pegged at 82.8%.
Azul’s total revenues per ASK or RASK were R$42.87 cents, up 12.2% sequentially and 0.6% year over year. Passenger revenues per ASK or PRASK increased 12.6% sequentially and 0.3% year over year on the back of AZUL’s rational capacity deployment and the sustainable competitive advantages of its business model.
Some Tailwinds Working in Favor of AZUL Stock
AZUL’s consistent focus on managing costs throughout its business has paid off. Evidently, cost per ASK (CASK) stayed almost flat compared with the reported figure for the third quarter of 2023. CASK, excluding fuel, fell 2.8% year over year. This marks a solid improvement given the 13.6% average depreciation of the Brazilian real against the US dollar and 4.2% inflation over the last 12 months.
AZUL also hopes to reduce its CASK with the help of its next-generation fleet, along with several other efficiency initiatives. To this end, AZUL has successfully reduced its full-time equivalent (FTE) employees by 1.5% sequentially, even with the airline growing 10%. This led to an improvement of FTE per ASK of 11.3%.
AZUL’s cost-cutting initiatives should boost profitability. Notably, in third-quarter 2024, AZUL reported an all-time record EBITDA of R$1.65 billion, increasing 6% year over year and 57.1% sequentially. EBITDA margin of 32% improved 50 percentage points from the year-ago quarter. Profitability amid increasing fuel cost per liter and higher average exchange rate is noteworthy.
Backed by a robust demand environment in both domestic and international markets, the positive trend in fuel prices and a higher number of fuel-efficient aircraft entering the fleet, Azul continues to anticipate its full-year EBITDA to be around R$6.0 billion.
For 2025, AZUL anticipates EBITDA to be R$7.4 billion, owing to strong travel demand, a rational competitive environment, and robust growth in its business units. Additionally, the restructured financing plan (aimed at improving liquidity and cash generation and reducing leverage) is likely to enable Azul to achieve its target for 2025.
Impressive Valuation Picture for AZUL Stock
From a valuation perspective, AZUL is trading at a discount compared to the industry, going by its forward 12-month price-to-sales ratio. The reading is also below its median over the last five years. The company has a Value Score of A.
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Headwinds Confronting AZUL Stock
The northward movement in operating expenses is hurting AZUL’s bottom line and challenging its financial stability. Operating expenses in third-quarter 2024 grew 3.8% year over year owing to the 3.7% increase in total capacity, 13.6% depreciation of the Brazilian real against the US dollar and an 8.6% increase in fuel price, offset by higher productivity and cost-reduction initiatives.
Further, AZUL has a disappointing earnings surprise history. The company’s earnings lagged the Zacks Consensus Estimate in each of the last four quarters, delivering an average miss of 100.76%. Driven by this downbeat earnings performance, AZUL’s shares have plunged 40.5% over the past three months, underperforming its industry. Additionally, AZUL’s price performance compares unfavorably with that of other airline operators like Copa Holdings, S.A. (CPA)and Ryanair Holdings RYAAY in the same time frame.
Three-Month Price Comparison
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Given the headwinds surrounding the stock, earnings estimates have been southbound, as shown below.
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Image Source: Zacks Investment Research
How Should Investors Approach AZUL Stock?
It is understood that AZUL stock is attractively valued, and upbeat air travel demand is contributing to AZUL’s top-line and EBITDA growth. AZUL is also gaining from its cost-cutting initiatives.
However, investors should refrain from rushing to buy the dip in AZUL now. For long-term investors, a single quarter’s results are not so important as they would rather base their investment decision on the underlying fundamentals.
AZUL faces quite a few the headwinds as highlighted above. In our view, investors should monitor the company’s developments closely for a more appropriate entry point. For those who already own the stock, it will be prudent to stay invested. The stock’s Zacks Rank #3 (Hold) supports our thesis. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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