Stock pick Gol is suddenly flying high on news
10/23/2013 6:25 pm EST
The ADRs climbed 9.4% on October 21, and another 4.6% yesterday. Today they pulled back 0.54% along with the general market.
What was the news?
First, as a result of cutting flights in order to reduce the number of unfilled seats, Gol reported a 23% year over year increase in net passenger income per available seat-kilometer. This marked the 18th consecutive increase in this measure of profitability.
Second, the weakness in the U.S. dollar after the Fed’s September decision not to begin tapering off its $85 billion in monthly asset purchases and the continued decline in the dollar on a belief that the Fed isn’t about to change policy until March 2014 has sent the dollar price that Gol pays for jet fuel, debt service, and airplane leases tumbling. All those costs at Gol are denominated in dollars while Gol’s revenue is denominated in the Brazilian real. A stronger dollar against the real had hammered Gol’s bottom line.
Third, the company has announced that it expects to sign two to three agreements with European partners that could include Air France and Lufthansa in the next year. That would go a long way to close the international traffic gap (just in time for the World Cup) between Gol and its biggest Brazilian competitor Tam that opened up when that airline was acquired by Latam Airlines (LFL), the biggest airline in Latin America and the fifth biggest airline in the world.
Despite the recent rally in Gol’s price, I think these ADRs have further room to run: the 52-week high is still another 38% above the current price even after this rally. Exactly how far and fast Gol will run will depend on the dollar/real exchange rate—as long as the dollar remains weak, Gol’s costs will either stabilize or decline. Brazil is due to host the 2014 World Cup with matches in the country beginning in June. The exchange rate and Gol’s fuel costs have overshadowed any likely pick up in traffic from that event over the last year but with the tournament now so close, I’d expect to see those hopes reflected in enthusiasm for the ADRs. I think a 20% gain from here is certainly an achievable target.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of Latam Airlines as of the end of June. For a complete list of the fund’s holdings as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/