06/14/2011 1:53 pm EST


Jim Jubak

Founder and Editor,

Doing some catch up on this stock. I added GOL (GOL) to the Jubak Picks 50 long-term portfolio on January 18, but this is the first time I’ve had an opportunity to explain why in detail or to actually add it to the portfolio. I’m still working on explaining the other sells and buys announced on January 18 from that group.

Shares of GOL Linhas Aereas Inteligentes (GOL) continue to close in on the June 29, 2010 low at $11.7182. Even yesterday’s solid report on May traffic couldn’t keep the stock of Brazil’s low cost airline out of the red. Today, of course, they're up on the global bounce but I'm not sure how long that will last.

May traffic, GOL reported yesterday June 13, climbed by 12.7%. The company recorded 2.44 billion revenue-passenger kilometers in May, up from 2.17 billion in May 2010. (A revenue-passenger kilometer is calculated by multiplying the number of paying passengers by the number of kilometers flown.)

GOL’s load factor—the percentage of available seats that are occupied—climbed to 62.9% in May from 57.9% in May 2010.

The problem for GOL—as for all the world’s airlines—is higher fuel prices. In announcing its first quarter financial results on May 10 GOL told investors to expect lower operating margins as a result of higher fuel costs. Revenue for the quarter climbed by 9.6% on a 7.4% increase in passengers and an improvement in the airline’s load factor to 72.4% from 70.2%. But operating margins fell to 10.2% from 11.1% as fuel costs climbed by 21% and labor costs rose by 26%. As of the end of the quarter the company had hedged 23% of estimated fuel consumption for the next year at $98.84 a barrel. (The company also announced 1,100 job cuts in the quarter.) Excluding fuel, GOL has done a good job in controlling costs with cost per available seat kilometer falling on a year-to-year basis for each of the last six quarters.

Part of GOL’s plans for future cost savings includes flying an increasingly standardized fleet on Boeing 737 aircraft (on the Southwest Airlines (LUV) model). To that end the company has been subleasing or selling non-standardized aircraft in its 111 airplane fleet.

With the Brazilian economy still slowing as a result of interest rate increases as the central bank fights to reduce inflation, it’s hard to pick a turn around point for Brazilian stocks. But remember that owning GOL is a long-term play on the growth of the Brazilian middle class. (In addition Brazil hosts the World Cup in 2014 and the Summer Olympics in 2016.) Historically bus travel has dominated Brazilian long-distance passenger travel market but in 2010 for the first time more people flew—66 million—than took the bus—49 million, according to Morningstar. And Brazil’s air travel market still has a long way to grow—annual enplanements person are still just 0.5 compared to 2.4 in the United States.

GOL is cheap at the current share price but I think investors will need to be patient. A reasonable one-year target price is $16 but I’d only recommend these shares right now for investors able to tolerate what could still be six-months of volatility—with much of it, potentially, to the downside.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund , may or may not now own positions in any stock mentioned in this post. The fund did own shares of GOL as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at


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