2025 Guidance And Delta Airlines Joint Venture Will Create Momentum

Key Takeaways

• Continued investment in customer experience and a share repurchase program supports revenue growth and enhances shareholder value.
  
• Strategic partnerships and operational efficiency are central to LATAM's improved margins and market expansion.
  
• Macroeconomic uncertainties and foreign exchange risk may pressure LATAM's revenue growth and profitability, necessitating potentially revised earnings forecasts amidst a competitive environment.

Catalysts

Provides passenger and cargo air transportation services in Chile, Argentina, Peru, Colombia, Ecuador, Brazil, the United States, other Latin American countries, the Caribbean, Europe, and Oceania.

• LATAM Airlines Group is increasing its full-year 2025 guidance due to strong financial performance and a stable demand environment, indicating expected growth in operating margin from 12%-13.5% to 13%-15%, positively impacting earnings.
  
• The inclusion of Argentina in LATAM's joint venture with Delta Airlines is expected to enhance strategic partnerships and expand market reach, likely boosting future revenues.
  
• Continued investment in customer experience, including modernized cabins and expanded Wi-Fi, alongside record levels of customer satisfaction, suggests potential for increased revenue from premium travelers.
  
• The launch of LATAM's first-ever share repurchase program reflects management's belief that the stock is undervalued, supporting shareholder value and potentially enhancing earnings per share by reducing share count.
  
• A disciplined cost strategy that maintains a stable unit cost despite capacity growth demonstrates operational efficiency, which can lead to sustained improvement in net margins.

LATAM Airlines Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LATAM Airlines Group's revenue will grow by 7.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.3% today to 9.8% in 3 years time.
• Analysts expect earnings to reach $1.6 billion (and earnings per share of $0.0) by about May 2028, up from $1.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $1.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.6x on those 2028 earnings, up from 8.9x today. This future PE is greater than the current PE for the US Airlines industry at 8.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.68%, as per the Simply Wall St company report.

LATAM Airlines Group Future Earnings Per Share Growth

Risks

• Fuel price volatility, geopolitical uncertainty, foreign exchange fluctuations, and potential disruptions in cross-border traffic are identified as global challenges, which could impact LATAM's revenue and profitability.
  
• LATAM observed a 5.3% decrease in consolidated revenues per ASK year-over-year, primarily due to currency depreciation in key domestic markets, potentially affecting net margins.
  
• Given the macroeconomic uncertainties, such as slower global economic activity, LATAM acknowledges the risk of needing to adjust its guidance in response to adverse conditions, impacting earnings forecasts.
  
• The airline faces a dynamic competitive environment in its core markets, which may pressure pricing and growth strategies, potentially affecting revenue growth.
  
• LATAM's exposure to foreign exchange risk, notably in Brazil where RASK decreased 12.4% in dollar terms, indicates an ongoing risk that can affect financial results, including net income.

Valuation

• The analysts have a consensus price target of CLP20.399 for LATAM Airlines Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CLP23.64, and the most bearish reporting a price target of just CLP17.02.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $16.0 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 11.7%.
  
• Given the current share price of CLP14.95, the analyst price target of CLP20.4 is 26.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.