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On Thursday, Raymond (NSE:RYMD) James adjusted its perspective on Azul SA (NYSE:AZUL) shares, downgrading the airline’s stock rating from Outperform to Market Perform. The shift in rating comes as analysts at Raymond James foresee inevitable further dilution of the company’s shares. According to InvestingPro data, the stock has already fallen over 90% in the past year and is currently trading near its 52-week low of $0.48. Their assessment is based on the pending completion of a $200 million optional equity raise, which they believe must be finalized before the stock can accurately represent Azul’s underlying fundamentals.
The downgrade coincides with reports from Wednesday evening by Bloomberg, suggesting that Azul and its creditors are considering various options, including a potential Chapter 11 bankruptcy filing. However, Raymond James analysts are wary of giving too much credence to these speculations, noting that such rumors have been circulating for over two years without fruition. While they do not dismiss the possibility of a bankruptcy filing, they consider it unlikely at this stage. InvestingPro data shows concerning financial metrics, with short-term obligations exceeding liquid assets and a total debt burden of $6.28 billion.
In terms of Azul’s operational performance, the analysts highlighted that revenue and demand are on a positive trajectory, aligning with expectations. Despite a challenging start to the year, marked by currency devaluation and temporary increases in irregular operations (IROPs) due to original equipment manufacturer (OEM) performance and supply chain issues, trends in operations, foreign exchange (FX), and fuel costs have been improving since March. The company generated revenue of $3.54 billion in the last twelve months, with a modest growth rate of 7.93%.
Reaffirming their confidence in Azul’s operational capacity, the analysts mentioned that the airline has reiterated its EBITDA guidance of R$7.4 billion for 2025. This projection remains unchanged, reflecting a stronger revenue trend that is expected to counterbalance an anticipated rise in non-fuel costs. The analysts also noted that the reduction in earnings per share (EPS) is attributed to a forecasted increase in interest expenses.
The downgrade by Raymond James serves as a cautionary indicator for investors, as it reflects the complexities facing Azul SA in the current financial climate. The completion of the equity raise and the clarity it brings regarding shareholder dilution will be closely monitored by the market to gauge the airline’s financial stability and investment potential. InvestingPro analysis indicates the stock is currently undervalued, though investors should note that analysts don’t expect profitability this year. For deeper insights into Azul’s financial health and valuation, including 12 additional ProTips and comprehensive metrics, check out the full Pro Research Report available on InvestingPro.
In other recent news, Azul S.A. reported first-quarter earnings where adjusted EBIT/EBITDA fell short of expectations, despite revenues exceeding forecasts. The airline attributed the underperformance to temporary operational disruptions but noted improvements starting in March. Fitch Ratings downgraded Azul’s credit ratings to ’CCC-’ due to liquidity concerns and challenges in securing new financing. The company has been actively working to enhance liquidity, securing R$600 million in short-term funding from existing bondholders. This funding is backed by credit and debit card receivables and has a six-month maturity.
Azul also completed a significant share offering, raising approximately $1.66 billion through a primary public offering of preferred shares. This move increased the company’s total capital to R$7.13 billion. Additionally, Azul updated its share structure following debt conversion events, issuing new shares to lessors, shareholders, and bondholders. Raymond James maintained an Outperform rating on Azul, with a $4.00 price target, despite the company’s earnings shortfall. The firm’s confidence is partly based on Azul’s previous guidance, which projects adjusted EBITDA ahead of consensus estimates for 2025.
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