GOL Scores a Tie in Brazil

We are keeping our Hold recommendation on Gol Linhas (GOL). The company has been enjoying impressive growth in the Brazilian domestic airline industry for the last few years, and the short-term growth outlook remains quite encouraging.

It is important to note that 2007 earnings were highly affected by the infrastructure crisis in the Brazilian airports, a problem that showed a slightly improvement in the first half of 2008. Additionally, 2008 results are now affected by high oil prices. Gol remains one of the fastest growing airlines in the world and with the acquisition of VRG the short-term growth outlook seems positive.

We were very encouraged to see that oil prices have begun to move down from the US$150 per barrel peak recently. The reaction in the airline industry was prompt. This was great news for GOL; nevertheless it is too early to be convinced that the oil problem is over.

However, we do not consider the current valuation particularly attractive, even considering that earnings will be more reasonable in 2009 since it is likely that the situation in the Brazilian airports will improve.

Second quarter 2008 results were negative and it is important to consider the short-term problems after the July disaster in the Congonhas airport, the still high oil prices and the difficult economic environment throughout the world. Currently, Gol is trading at 11.6x our 2009 estimated EPS. We set a target price of US$10.00, representing a valuation between 12x and 12.5x our 2009 P/E, in line with the valuation of the Brazilian benchmark Bovespa.

Read the full analyst report on GOL

Read the full analyst report on GOL