Brazilian low-fare carrier Gol Linhas Aéreas Inteligentes (GOL, quote) reported earnings last week. Although GOL produced a loss for the quarter, the stock rallied. This begs the question: how should investors treat the most recent developments?
While the above are not heartening for investors, the stock reacted positively to indications from the company that its cost-cutting efforts to rein in spending, such as decreasing capacity, have started to work.
In terms of equity performance, GOL’s short-term movements usually reflect moves in both the real and the price of oil. Because 60% of GOL’s costs and 80% of its debt are dollar-denominated, real weakness against the dollar adversely affects the stock. The recent proclivity by the Brazilian central bank to cut interest rates have unsurprisingly hurt GOL’s stock.
However, airlines have been buoyed over the past week by the sizable drop in Brent crude (BNO, quote). If the global economy continues to slow down, and there is a concomitant decline in demand for oil, airline stocks like China Southern (ZNH, quote), LAN (LFL, quote), and COPA (CPA, quote) could all see their share price appreciate. For GOL in particular, a steep move down in oil would likely outweigh the effects of a further weakening in the real, which is mostly priced into the stock at this point.
For long-term investors, there were two notable takeaways from the conference call: one positive, one negative. GOL stated that the airline is still set to return to profitability in the second half of 2012; however, this quarter’s most recent loss has increased GOL’s long term liabilities, rendering their debt profile even more vulnerable to a downgrade.
Although the company’s debt situation is disconcerting, if the company can indeed turn a profit later in the year, GOL will likely appreciate from here. Investors under the impression that oil will continue to fall could go long here, with the caveat that if GOL fails to turn a profit later in the year that investors eliminate their positions in the name.
Disclosure: Author is long GOL