Brazilian Airline GOL Continues to Gain Altitude (GOL)

Mar.13.06 | About: GOL Linhas (GOL)

Gol Linhas Aereas Inteligentes (GOL), the low-cost Brazilian airline, is continuing to gain altitude. The ADR has suffered in recent weeks thanks in large part to currency fluctuation and, I imagine, to some profit taking after a remarkable run. I was sorely tempted to buy more when it dipped down below $26 on Friday, and I may still regret not taking that opportunity.

GOL reported more of what they always report -- they are still stimulating demand for air travel in South America by slashing prices, but at the same time they're extremely profitable ... this isn't a company that's operating at a loss in order to gain customers, instead they're achieving the highest margins of any publicly traded airline in the world.

Margins continue to be very solid according to their earnings release (net margins of 20% for the fourth quarter), and it's definitely worth listening to their conference call and viewing the presentation -- this company is extraordinary at investor disclosure and truly seems to want investors to understand how they work.

There are certainly concerns as well -- expanded air travel in Brazil is very much tied to the performance of the Brazilian economy in general, so a decline there would definitely hurt Gol (though I submit that it would hurt their higher-cost, massively indebted competitors much more). And they pay below-market jet fuel prices thanks to the Petrobras price controls, but those prices are still climbing and they do impact on GOL's profitability.

But overall, I'll remain tempted to build a larger position if we see any more weakness here. GOL is targeting an addressable market that is truly massive -- 20 million potential customers according to their strategic plan, and they're a long way from reaching that goal. They've got about a 30% share of the growing Brazilian domestic market (and climbing) and are able to cut fares but still increase earnings through very strict cost controls ... and that doesn't even take into account their growing international presence across the cone of South America.

They pay for their plane leases and maintenance obligations with free cash flow and plan to be able to continue to do so even as their fleet doubles over the next five years, meaning that debt will not be a significant burden for them. They are richly valued compared to most airlines, and though they seem expensive for an "emerging market" stock in some ways at a trailing PE over 20, their earnings growth (projected 2006) of more than 50% certainly justifies that ... and even after a remarkable year, they have still actually underperformed the Brazilian market as a whole thanks to that market's heavy weighting in oil and resource stocks.


GOL 1-yr Chart

« Any opinions expressed on the Seeking Alpha sites are those of the individual authors and do not necessarily represent the opinion of Seeking Alpha or its management. »