Is it time to go short or long Gol stock?

Brazilian low-fare airline Gol Linhas Aéreas Inteligentes (GOL, quote) finally issued 2011 earnings Tuesday morning, reporting a Q4 profit of 54.27 million Brazilian reais ($30 million), a decrease from the 132.2 million reais ($72.8 million) profit the previous year.

While revenue increased 19.5% this quarter year-on-year, operating expenses were up 41% due to increased fuel, personnel, and maintenance costs.

Full year results were less than stellar, with the carrier incurring a 669 million reais ($369 million) loss for FY 2011.

It’s difficult to prognosticate the future profitability of the stock as many of the relevant variables are out of GOL’s control. 60% of GOL’s costs and 80% of its debt is dollar-denominated, but the majority of its revenues are in reais. As a result, GOL’s performance is contingent upon the strength of the Brazilian real.

Further, persistently high fuel prices and a mediocre debt profile could continue to pressure the stock.

However, there do exist a number of positives for the stock. Last year’s loss stemmed largely from currency concerns and a debilitating fare war in the Brazilian domestic sector. The latter has since subsided, affording GOL a better chance to return to profitability for FY 2012.

Although competition remains in the Brazilian domestic aviation market, with four principal carriers — Azul, AviancaBrasil, GOL and TAM (TAM, quote) — vying for traffic, GOL has little desire to foment another fare war. Chief Executive Officer Constantino de Oliveira Junior has emphasized profitability over increased market share this year.

GOL will continue to benefit from macroeconomic catalysts like Brazil’s growing middle class and an increase in travel demand to Brazil with the upcoming World Cup in 2014 and Summer Olympics in 2016.

In terms of GOL-specific positives, the airline will benefit from increased synergies from its merger with Webjet, new lucrative landing rights at slot-controlled airports, proposed flights to the United States, and a code-sharing deal with Delta Airlines (DAL, quote).

While the LAN (LFL, quote)-TAM merger continues to attract the most attention from industry watchers in Latin American aviation stocks, plucky GOL continues to consolidate its position as Latin America’s largest low-fare carrier. While LATAM, as the merged entity is known, will be the dominant South American carrier on medium and long-haul routes, GOL’s prime position in the low-fare segment of Brazilian domestic aviation should remain intact. 

However, in order for the stock to outperform, GOL will need to both improve its debt profile and hope for a little help in currency and fuel markets. 

Short-term traders could look to go long GOL as a proxy for Brazilian real strength and oil weakness. Conversely, traders with the belief that oil prices will remain elevated and foresee a strengthening dollar against the real should consider shorting GOL.

Long-term investors might look for a substantial pullback under six to start a long position, operating under the assumption that a reversion to the mean in oil prices and positive Brazilian macroeconomic catalysts will eventually see this stock move higher.

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