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Azul (AZUL) Shares Up 90% in a Year: What's Behind the Rally?

Zacks Equity Research

Shares of Azul SA AZUL have soared 90.5% in a year’s time against the industry’s 3.9% decline.


Reasons Behind the Price Rise

Strong passenger revenues on the back of rising travel demand have been aiding the company immensely. Notably, passenger revenues accounting for bulk of the company’s top line increased 17.9% in 2018. Moreover, the same augmented 15.3% during the first quarter. With demand remaining strong, the uptrend is likely to continue through the ongoing year.

The company operates a young fleet of approximately 5.9 years (as of Dec 31, 2018), which is more fuel-efficient and help lowering the maintenance costs. In order to boost efficiency, the company is undergoing a free transformation process of adding Rodger Jets’ next- generation aircraft. The aircraft is expected to reduce costs significantly while generating higher revenues, which in turn, will aid in margin expansion.

Additionally, this February, the company announced the acceleration of fleet renewal and modernization plan for 2019, where by it expects to increase the number of next-generation aircraft to 21, representing a rise of 8. With progression in the fleet transformation, the company’s unit costs have been declining significantly. Evidently, increase in efficiency led to a 2.4% decrease in CASK controlling for fuel, currency and the return of the payroll tax during the first quarter.

Owing to the positivity surrounding the airline’s fleet transformation to include next-generation jets, Azul issued an encouraging outlook for unit costs in 2019. The metric is expected to dip between 1% and 3% year over year. The carrier aims to add 21 next-generation aircraft and replace 15 older jets in 2019. Consequently, half of Azul's capacity in 2019 will be held by next-generation jets.

Azul also boasts an impressive earnings history, having outperformed the Zacks Consensus Estimate in three of the last four quarters, the average beat being 54.1%.

Amid the optimism, the Zacks Consensus Estimate for the company’s second-quarter earnings has moved upward by more than 100% over the last 30 days. The same for 2019 earnings has been raised 4% in the same time frame.

Zacks Rank & Key Picks

Azul carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader Transportation sector are Air China Ltd. AIRYY, SkyWest, Inc. SKYW and Radiant Logistics RLGT. While Air China sports a Zacks Rank #1 (Strong Buy), SkyWest and Radiant Logistics carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Shares of Air China, SkyWest and Radiant Logistics have rallied more than 15%, 26% and 38%, respectively, so far this year.

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