Government Regulation And Rising Costs Will Erode Latin American Earnings

Key Takeaways

• Regulatory pressure, alternative transport growth, and digital shifts threaten LATAM's premium revenues, competitive positioning, and overall profitability.
  
• High debt, currency volatility, and rising costs limit investment capacity, compress margins, and endanger sustainable earnings.
  
• Streamlined operations, network diversification, and enhanced customer experience are fueling sustainable growth, stability, and stronger financial performance for LATAM Airlines Group.

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.

• The company's future profitability is at risk as governments intensify regulatory actions and taxation on carbon emissions, driving up operating costs for LATAM while undermining its cost advantage. This will erode both its net margins and overall earnings regardless of near-term operational gains.
  
• Growth in digital connectivity, including remote work and widespread adoption of virtual meetings across Latin America, is expected to deliver a structural and permanent decline in business travel demand, reducing LATAM's premium-class revenues and compressing top-line growth.
  
• Despite recent strong earnings and leverage improvements, LATAM's significant debt burden stemming from its post-bankruptcy restructuring will restrict investment flexibility and elevate interest expenses over time. This threatens their ability to invest in fleet and technology, ultimately impacting future net income and cash flows.
  
• Persistent devaluation and volatility in major local currencies, such as the Brazilian real and Argentinian peso, will continue to undermine dollar-reported revenues and inflate local operating expenses, placing structural pressure on net margins and translated earnings.
  
• The rise of alternative transportation, including new high-speed rail projects planned in major South American corridors, will gradually erode demand on key regional routes for LATAM, lowering load factors, reducing overall passenger traffic, and ultimately cutting into both revenues and profitability over the long run.

LATAM Airlines Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on LATAM Airlines Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming LATAM Airlines Group's revenue will grow by 6.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 8.9% today to 11.2% in 3 years time.
• The bearish analysts expect earnings to reach $1.8 billion (and earnings per share of $0.0) by about September 2028, up from $1.2 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 9.0x on those 2028 earnings, down from 13.2x today. This future PE is lower than the current PE for the US Airlines industry at 13.2x.
• Analysts expect the number of shares outstanding to decline by 1.6% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.7%, as per the Simply Wall St company report.

LATAM Airlines Group Future Earnings Per Share Growth

Risks

• The ongoing robust demand for air travel in both domestic and international markets across Latin America, combined with a rising middle class and growing disposable incomes, points to sustained top-line growth for LATAM, supporting long-term revenue expansion.
  
• LATAM's post-Chapter 11 restructuring has resulted in a much improved cost structure, supported by fleet modernization, lower unit costs and disciplined cost control, which is now translating into expanding operating margins and stronger net earnings.
  
• The diversification and optimization of LATAM's network has reduced exposure to seasonal fluctuations, as premium passenger revenues-which are less cyclical and more stable-now comprise a growing share of the revenue mix, helping to stabilize earnings throughout the year.
  
• LATAM's substantial investments in customer experience, including cabin upgrades and connectivity, are enhancing brand perception and loyalty, leading to repeated recognition as South America's best airline and supporting healthier load factors and pricing power, which ultimately benefits revenues and margins.
  
• The company's capital structure has dramatically improved, with a strong liquidity position, reduced leverage through successful refinancing, and the capacity to return capital to shareholders while still funding growth initiatives, all of which bolster confidence in the durability of future free cash flow and earnings.

Valuation

• The assumed bearish price target for LATAM Airlines Group is CLP19.33, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of LATAM Airlines Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CLP29.0, and the most bearish reporting a price target of just CLP19.33.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $15.9 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 12.7%.
• Given the current share price of CLP25.25, the bearish analyst price target of CLP19.33 is 30.6% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.