There’s no stopping the Azul SA. (NYSE:AZUL) growth train, with analysts forecasting high top-line growth in the near future. Currently trading at US$25.71, the share price has been relatively stable over the past couple of months. I’ve been researching AZUL for a while, and am impressed with the business led by Mr. John Rodgerson. In this article, I’ve written a brief commentary on the key things you’d need to believe in order to be long AZUL.
Azul S.A. provides passenger and cargo air transportation services in Brazil. Founded in 2008, it currently operates in Brazil at a market cap of US$3.09B.
The company is growing incredibly fast, with a year-on-year revenue growth of 16.79% over the past financial year . Over the past five years, sales has grown 15.75%, concurrent with larger capital expenditure, which most recently reached R$589.50M. With continual reinvestment into business operations, a return on investment of 50.20% is forecasted for the upcoming three years, according to the consensus of broker analysts covering the stock. Net income is expected to grow to R$623.45M over the next year, and over the next five years, earnings are predicted to rise at an annual rate of 21.90% on average, compared to the industry average growth of 11.20%. These figures illustrate AZUL’s strong track record of producing profit to its investors, with an efficient approach to reinvesting into the business, and a buoyant future compared to peers in the sector.
Investors tend to get swept up by a company’s growth prospects and promises, but a key element to always look at is its financial health in order to minimize the downside risk of investing. Alarm bells rang in my head when I saw AZUL’s debt level exceeds equity on its balance sheet, and its cash from its core activities is only enough to cover a mere 8.47% of this large debt amount. Furthermore, its EBIT was not able to sufficiently cover its interest payment, with a cover of 2.24x. This does lower my conviction around the sustainability of the business going forward. AZUL has poor liquidity management. Firstly, its cash and other liquid assets are not sufficient to meet its upcoming liabilities within the year, let alone its longer term liabilities. Secondly, more than a fifth of its total assets are physical and illiquid, such as inventory. Keeping in mind the downside risk, if we think about the worst case scenario, such as a downturn or bankruptcy, a non-trivial portion of its assets will be hard to liquidate and redistribute back to investors.
AZUL is now trading at US$25.71 per share. With 336.35 million shares, that’s a US$3.09B market cap – which is too low for a company that has a 5-year free cash flow cumulative average growth rate (CAGR) of 11.22% (source: analyst consensus). Given the consensus 2018 FCF level of R$507.00M, the target price for AZUL is R$33.92. Therefore, the stock is trading at a 24.20% discount. Although, comparing AZUL’s current share price to its peers based on its industry and earnings level, it’s overvalued by 74.64%, with a PE ratio of 18.49x vs. the industry average of 10.59x.
If you’re thinking about buying AZUL, you have to believe in its growth story, and the possibility that it has not yet been factored into its share price. However, my main reservation with the company is its financial health. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.