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Azul: Add This Stock To Your Watchlist

Mar. 09, 2020 8:45 PM ETAzul S.A. (AZUL)5 Comments


  • Following the stock's 55% drop in only six weeks, Azul continues to report very solid operational metrics.
  • Domestic flights have not been impacted by the COVID-19 spread, but traffic growth could decelerate later in the winter season.
  • Is now the right time to buy airline stocks? Probably not. But I believe AZUL should eventually reclaim previous highs.
  • Looking for a helping hand in the market? Members of Storm-Resistant Growth get exclusive ideas and guidance to navigate any climate. Get started today »

Given the current market rout that has been particularly damaging to companies in the travel and leisure industry, this may be the worst time to discuss airline stocks. But following Azul's (NYSE:AZUL) February traffic update, I find myself compelled to talk about this particular name, which has been down a mind-boggling 55% in less than six weeks.

Azul reported traffic numbers that impressed once again, despite growth in RPK (revenue passenger kilometers) and ASK (available seat kilometer) having decelerated since 4Q19. Occupancy improved minimally YOY in February, a feat that I don't believe any airline in the US has been able to pull off in the most recent month.

Credit: Flickr

Traffic remains robust

The COVID-19 spread had already been a hot topic of conversation since January 2019, but the negative business implications did not start to surface until the second week of February. Still, possibly due to the fact that (1) the disease did not spread to Brazil until February 25 and (2) roughly 75% of Azul's traffic is domestic, the Barueri-based company does not seem to have suffered the consequences of the virus's global proliferation.

The graphs below depict RPK and ASK trends at the total company level since the early 2017 IPO. Notice how growth in both cases has been decelerating since October 2019 still to an impressive 25% YOY in February.

However, the downward trend started to form well ahead of any breaking news on the COVID-19 and seems to be better explained by a natural correction that followed the initial (positive) impact of Azul's Rio-São Paulo route debut, in late August 2019. In fact, only the domestic segment has been experiencing traffic growth declines, while the international division continues to recover steadily from April 2019 lows - for now, at least.

Source: DM Martins Research, using

I do not yet own AZUL because I have been focused on creating superior risk-adjusted returns in the long run using a different strategy. To dig deeper into how I have built a risk-diversified portfolio designed and back-tested to generate market-like returns with lower risk, join my Storm-Resistant Growth group. Take advantage of the 14-day free trial, read all the content written to date and get immediate access to the community.

This article was written by

DM Martins Research profile picture

Daniel Martins is a Napa, California-based analyst and founder of independent research firm DM Martins Research. The firm's work is centered around building more efficient, easily replicable portfolios that are properly risk-balanced for growth with less downside risk.

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Daniel is the founder and portfolio manager at DM Martins Capital Management LLC. He is a former equity research professional at FBR Capital Markets and Telsey Advisory in New York City and finance analyst at macro hedge fund Bridgewater Associates, where he developed most of his investment management skills earlier in his career. Daniel is also an equity research instructor for Wall Street Prep.

He holds an MBA in Financial Instruments and Markets from New York University's Stern School of Business.

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On Seeking Alpha, DM Martins Research partners with EPB Macro Research, and has collaborated with Risk Research, Inc.

DM Martins Research also manages a small team of writers and editors who publish content on several TheStreet.com channels, including Apple Maven (thestreet.com/apple) and Wall Street Memes (thestreet.com/memestocks).

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (5)

seekfind123 profile picture
@DM Martinis. Very curious as to your current thinking on AZUL. If only 6 weeks after this report. AZUL is down 60% since this report and 80% since your original report of a year ago. I do not mean any disrespect. A lot has happened in the world.  

But now would seem one of those terrific binary moments. Either AZUL is a steal, or there’s gonna be a highly dilutive re-capitalization.

Any thoughts?
DM Martins Research profile picture
Good question... I will need to defer my answer until I can do a bit of homework on this again. To your point, a lot has changed in the whole world in 60-90 days.

Generally speaking, being involved with the airline industry today is very risky, let alone a company that generates most of its revenues (non-USD denominated, primarily) in an emerging country. Brazil has also been a bit behind the curve on the virus spread, so they may start to really feel the pinch in the near future. So generally speaking, caution is advised -- either by staying away or by sizing the bet properly.

That's all I have for now, I'll try to look at AZUL again soon... happy investing!
InvestLT profile picture
@D.M. Martins Research
Can you help me on the debt. Actual long term bonds o/s
@D.M. Martins Research Hello again. Thanks for continuing to track and write about AZUL. I am in total agreement on the strength of the company. The impact of the coronavirus on their flights remains to be seen--if Brazil follows other countries with expansion of cases, I would anticipate a sharp decline in bookings and a reduction in flights scheduled. I must say you are right and I commend you for not investing yet. I was nibbling in the upper 30s (ouch) anticipating another 10% up and down, to enter and exit for a small gain. As it has come down, I have bought small additions every $5 of drop. The only good thing I did was to buy larger amounts as price came down, to overweight the lower price in my holding. When it hit close to $20 yesterday I didn't even bite! But despite today's rally, my guess is we are going down into the teens, and I'll buy more. I'll make money on all these purchases eventually, but it's going to take time. Now, I'm not a complete idiot, because as the market was going up, I was selling stocks into strength, and even with a bunch of small purchases (mostly REITs, which have also dropped like rocks), I still have a good amount of dry powder, about 8% of my portfolio is in cash, and I am being patient (but not enough so, obviously). Good luck with your trades/investments!
DM Martins Research profile picture
Thanks, Catskills. I've never been particularly good at timing entries and exits consistently (who has?), but it seems to me a bit premature to go "all in" here. The averaging down approach makes sense to me.

Happy investing!
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