Investing in Patagonia's Consumer Airlines

 |  Includes: GOL, LFL
by: Emerging Money

Argentina is a key market for two of the biggest passenger carriers in Latin America: Gol Linhas Aereas Inteligentes (NYSE:GOL) of Brazil and Chile-based Lan Airlines (NYSE:LFL).

GOL: With the imminent merger of rival TAM into LFL, Gol is now unquestionably the biggest Brazil-based carrier. By U.S. standards, it trades like a small-cap blend stock.

In terms of growth, GOL seems reasonably priced with a PEG of 1.35 -- a little above the air industry median of 1.3. However, the stock is a bit cheap on a value basis with a PE of 17.12 compared to the 18.7 industry median. The company is also one of the more profitable names in the industry with its net margin of 6.96% and above-average operating margins.

GOL has a debt to total capital ratio of 54.65%, which is in line with industry norms. Still, the company could face trouble servicing its debt as both its interest coverage and quick ratios show that neither operating profits nor current assets alone are great enough to satisfy interest obligations. Short interest in GOL is 5.71% and 21.99% of the float is held by institutions.

Bottom line: Although GOL seems to be inexpensive, its debt/capital ratio outweighs its strong profit margin, making this a riskier trade without the possibility of using options for protection. One may want to take a pass and look for better risk/reward elsewhere.

LFL: Chile's biggest carrier and, after the TAM merger, a regional giant. This company trades like a large-cap blend stock in U.S. terms. LFL seems highly valued on a growth basis with a PEG value of 3.3736, one of the highest in the airline industry, and the stock's PE is 33.7363, almost double the industry median of 18.7. That said, the company is one of the more profitable in the business, with a net margin of 7.91%. Short interest is 5.14% and only 8.28% of the float is held by institutions.

Bottom line: If you have to own an airline, LFL can warrant a look on any pullbacks. Recently, the stock finally broke a nearly 3-month aggressive uptrend line. Consider looking for a pull back to support at around $25.50.

Disclosure: No position