Investing in foreign markets can be scary. You have to deal
with geopolitical issues, currency fluctuations and a general
lack of available information.
Fortunately for investors, some fast-growing emerging markets
are much better than others. This includes Latin America's
largest economy, Brazil.
Although it's still the prize of South America, the country
has yet to live up its true growth potential. As a result, the
Brazilian economy is expected to grow by close to 3% in 2014,
with unemployment remaining below 6%. (Two of my colleagues are
split on the country's prospects: Andy Obermueller, Chief
Investment Strategist of
is bullish on Brazil
. My colleague Joseph Hogue, on the other hand, thinks the
country may be
headed for bankruptcy
What the country needs is a catalyst. Enter next year's World
Cup, which is expected to bring more than 600,000 tourists to
Brazil, with another 3 million Brazilians traveling around the
country for the monthlong tournament.
With all this activity, Brazil is expected to become the
world's fourth-largest aviation market in 2014, with more than
100 million passengers. That growth is poised to continue with
the Summer Olympics coming in 2016.
Gol Linhas Aereas Inteligentes (NYSE:
is one of the best pure plays on the Brazilian airspace, with
close to 150 aircraft and 90% of its capacity in the country. But
the past three years have been punishing for investors: The stock
is down some 75%, and Gol carries one of the largest debt loads
in the industry.
However, the current valuation appears to be pricing in the
absolute worst case, and Gol's balance sheet is overshadowing its
Last year was a "realization year" for Gol, which began a
period of right-sizing, starting with capacity. Its capacity
changes will involve focusing on more profitable and stable
routes. Part of this includes the grounding of old planes. During
2012, Gol reduced domestic capacity by 5.4% from the previous
As far as 2014, the company expects revenue to grow with the
help of a 5% to 8% increase in international market supply. As
well, Gol has been looking to some non-recurring activities to
help boost revenue, which includes subleasing planes to the likes
of Dutch carrier Transavia.
Brazil is expected to become the world's
fourth-largest aviation market in 2014, with more than
100 million passengers. That growth is poised to continue
with the Summer Olympics coming in 2016.
In any case, investors are already seeing some of the benefits
from its improved operational efficiency. Gol was named the most
punctual airline in the Brazilian market for the first nine
months of 2013, with 94.4% on-time performance. In October, yield
and load factor growth led to a 21% increase in Gol's passenger
revenue per available seat kilometer.
Gol's improvements have been overshadowed this year by oil
volatility and depreciation in the Brazilian real, which fell
from 2 reals to the U.S. dollar in the first quarter to 2.4 reals
per dollar at the end of the third quarter. Increased oil
volatility placed even more pressure on margins, but amid an 8.3%
year-over-year increase in average fuel prices in the third
quarter, Gol managed to reduce its fuel consumption per seat.
Gol is shooting for a 1% to 3% margin on earnings before
interest and taxes (EBIT) for full-year 2013, with a target of
7.5% in 2015. Compare this with 2009, when Gol churned out a 10%
operating margin; before 2007, 20%-plus operating margins were
Gol is also getting help from the Brazilian Association of
Airlines, which is working with Brazil's government on the
industry's needs. The association has a goal for doubling the
number of tickets sold in Brazil, to 200 million, by 2020. To
that end, the association and a consortium of Brazilian airlines
recently asked Brazil's civil aviation authority for help in
regaining profitability. Among the requests were reductions in
the state value-added taxes on fuel prices, tax subsidies on jet
fuel, and the suspension of landing fees for several months. If
approved, these subsidies could further boost Gol's margins.
However, as mentioned, Gol is one of the most indebted
airlines in the business. To accelerate its deleveraging, Gol
recently completed the IPO of its Smiles frequent-flier program.
The IPO not only helped Gol raise proceeds for debt reduction, it
also helps the company refocus on its core operations.
The other thing that worked against Gol over the past year,
effectively ballooning its debt load, was the weakening Brazilian
real. Three-quarters of Gol's debt is denominated in U.S.
dollars, so an expected stabilizing of the real against the
dollar should be a big positive.
Risks to Consider:
Gol's debt level remains a chief concern for investors. The
company has $2.7 billion in debt, compared with a $1.2 billion
market cap. Any missteps in generating cash flow could put
pressure on the company's ability to make debt payments. On the
other hand, the company does boast nearly $1.3 billion in cash,
which is over $4.50 per share. As well, most of of its debt
doesn't come due until after 2017. Only 2% is due next year.
Action to Take -->
Buy Gol for a potential doubling of its stock price. Gol trades
at an enterprise value-to-sales ratio of a mere 0.6. Compare this
with major Latin American peers LATAM Airlines Group at 1.25 and
Copa Airlines at 2.8. With expected 2014 sales of $3.9 billion
and an EV/sales multiple of 1, the upside could be a share price
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