Chile's LAN Airlines Soars Ahead of Competitors

Chile's LAN Airlines SA (LFL), one of Latin America's largest carriers, reported on Tuesday that its September traffic increased more than 15 percent from the year-earlier period, thanks largely to a jump in international traffic. This follows a nearly 12 percent year-over-year increase in passenger traffic in August. This solid business helped push LAN's shares up more than 18 percent over the last 13 weeks, outperforming the 4 percent average decline in the airline industry. Yet, its price to earnings (P/E) ratio values the airline at a discount to the industry, helping it appear on the Reuters Select stock screen for Industry Leaders.

The Industry Leaders screen is designed to find companies that lead their peers on the basis of valuation, long-term revenue and earnings growth, and debt levels. The screen requires that a stock's P/E ratio must be no more than 10 percent above the industry average. As indicated below, LAN's P/E is well below the industry mean, thus it satisfies the valuation requirement of the screen. Note, though, that it is priced just above the industry norm on the basis of other metrics, such as P/Sales and P/Cash Flow and considerably higher when it comes to P/Book Value.

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Regarding growth, the screen focuses on companies with revenue and earnings per share [EPS] growth rates that are at least 10 percent above the industry average over the last five years. As indicated below, the carrier easily meets this requirement, despite weakness in earnings growth in the most-recent quarter [MRQ].

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When reflecting on these growth rates, it is important to note that analysts are relatively optimistic on next year's performance, and look for EPS to improve. Further, expectations for lower fuel prices helped the consensus estimate for 2007 climb from $3.04 a month ago to $3.11 at present.

Taking a closer look at the carrier's results, we see that much of the recent shortfall in earnings stemmed from an increase in net interest expense and a decline in other non-operating income. Still, LAN's relative debt levels seem reasonable: As indicated below, the company's long-term debt to equity and total debt to equity ratios are lower than the industry averages. Thus, the carrier also meets the below-average-debt requirement of the Industry Leaders screen.

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The screen then turns to profit margins and requires that a company's net profit margin must be at least 10 percent wider than the industry average in the trailing 12-month [TTM] period. Not only does LAN meet this criterion, but most of the carrier's profit margins have widened in the trailing 12-month [TTM] period from the five-year averages.

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Although LAN landed on the Industry Leaders screen, there are some caveats. For instance, the airline's shares are actually American Depositary Receipts (ADRs), which are baskets of foreign shares that, as a bundle, trade like a stock on U.S. exchanges. As such, ADRs expose investors to the political, economic, and currency risks associated with foreign investing. One LAN ADR represents ownership of five shares.

At the time of publication, Erik Dellith did not own shares of LFL. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.

Note: This is independent investment and analysis from the Reuters.com investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by Reuters.com.

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