Blue Skies in Brazil
11/25/2005 12:00 am EST
"There are blue skies ahead for Gol Linhas," notes Charles Norton, editor of SuperNova Stocks, a service that focuses on uncovering lesser known companies involved in rapidly expanding markets. Here, he takes a flight with a growing low-cost airline in Brazil.
"Air transportation has historically been affordable only to the higher income segment of Brazil’s population. Enter Brazil’s only no-frills airline, Gol Linhas Aereas Inteligentes (GOL NYSE). Gol’s low-cost, low-fare business model has played a major role in significantly increasing the use of air transportation in Brazil. As a result, total air travel is up nearly 20% from year-earlier levels, and Brazil’s market now ranks second, only behind China, in terms of projected air-travel growth.
"Gol’s secret to success is simple: keep costs down. Gol’s cost per available seat kilometer—at less than six cents— is one of the lowest in the airline industry worldwide, and 30% lower than its primary competitors. In less than five years, Gol has captured 28.8% of the domestic Brazilian market, measured by revenue passenger kilometers, and now stands as the country’s number-two airliner behind TAM Linhas Aereas SA.
"The company began its operations in January 2001 with six single-class Boeing aircraft serving five cities in Brazil. Today, with its fleet of 39 Boeing 737 planes, Gol offers 400 daily flights to 44 major business and tourist destinations in Brazil and Argentina. While impressive, the company’s growth spurt is still underway. Gol plans to double its fleet in the next five years. The company commenced service to Buenos Aires and Bolivia and next up are flights to Montevideo, Uruguay, and Asunción, Paraguay. And Gol is teaming up with Mexican businessman Fernando Chico Pardo to launch a low-fare airline in Mexico, Latin America’s biggest economy.
"Gol has an impressive track record of growing sales and earnings. Earnings are expected to be up 76% this year and 38% in 2006. The company seems to have caught the attention of several distinguished institutional investors. Boston-based hedge fund Vinik Asset Management, run by Jeffrey Vinik, former manager of Fidelity Investment’s Magellan mutual fund, is the fifth largest holder with a 2.7% stake. Plus, Stanley Druckenmiller’s Duquesne Capital and Nicholas Applegate Capital Management have both taken new positions in Gol, according to SEC filings.
"Despite Gol’s strong fundamentals and bright growth prospects, the stock still appears reasonably valued, trading at 11 times forward earnings, significantly lower than its long-term growth rate and the industry average, which is closer to 25 times. Gol became public last June, and has been building a base, trading in a narrow range from $25 to $36. The stock is now nearing the top end of that range, and a heavy-volume break above $36.53 would provide the best entry. It looks like there’s nothing but clear skies ahead."