A: Invest $1 billion in an airline.
That’s a longstanding joke among old investment hands. But as both Southwest Airlines in the U.S. and Ryanair in Europe have shown, it is possible to run a profitable airline — if you have the right business model.
This week’s Global Bull Market Alert pick highlights a Brazilian low-cost, low-fare airline — GOL Linhas Aéreas Inteligentes S.A. (GOL) — one of the fastest growing airlines in the world. Like other discount airlines, GOL’s objective is to stimulate demand for air travel by slashing prices. But unlike some competitors that operate at a loss in order to gain customers, GOL has been extremely profitable since its launch in 2001. Today, GOL boasts the highest profit margins of any publicly traded airline in the world.
Three things come to mind in describing GOL: growth, efficiency, and friendly investor relations.
First, growth. GOL already offers over 440 daily flights to 49 major business and travel destinations throughout South America. Despite already having a 30% share of the Brazilian domestic market, GOL’s system-wide passenger traffic increased 58% over the past 12 months. Yet with GOL targeting a potential market of 20 million customers, it could easily triple its current size. That seems to be precisely GOL’s intention: it recently announced plans for expansion of its fleet from 40 to 105 planes between now and 2009.
Second, efficiency. GOL’s net margins for the 4th quarter of 2005 reached 20%, the highest operating margin for any airline in the world. (By way of comparison, U.S. champion Southwest Airline’s margin was only 7%!). GOL’s net profit was up 33 percent in 2005. GOL’s secret? It runs a simplified operation with a single class of service. It also has one of the youngest and most modern fleets in the industry. That means low maintenance, fuel and training costs, with high aircraft utilization and efficiency ratios.
Finally, friendly investor relations. GOL is as investor-friendly as companies come. It recently received two awards recognizing it as #1 in the "Disclosure Procedures" category in Latin America, and as #1 in the Consumer Goods and Services Industry worldwide. That makes GOL a global investor relations champion. For more information, see GOL’s website.
GOL’s recent drop from a peak of $34 represents a terrific buying opportunity. After hitting $25 last Friday, institutional buyers stepped in and GOL clawed its way back up to near $27. Why the steep drop? General market nervousness and profit taking. But with a forward P/E of less than 13, and a PEG ratio of .57 based on yesterday’s closing price, GOL is a screaming buy. Look for the stock to bounce back above $30 soon.
Let’s buy GOL at market today, with a stop price of $19. For even more potential upside, buy the $30 July call options (GOLGF.X)
PORTFOLIO UPDATE
China Petroleum & Chemical (SNP) hit our stop last week. Our other Global Bull Market picks are holding up well in what was a skittish week in global markets.
