We downgrade our recommendation on GOL Linhas Aereas (GOL) from Neutral to Underperform based on the competitive Brazilian aviation market, wherein the airport infrastructural crisis is leading to lower efficiency and higher operational cost for the airline companies, including GOL. Moreover, the risk of a dwindling customer demand across GOL's operating route network along with its dependence on a few clients may put pressure on the stock.
The company reported a loss per share of R$1.33 (US$0.84 per ADS) in the quarter compared with the Zacks Consensus Estimate of a loss of US$0.15 per ADS. The recent rise in fuel prices and appreciation of the Real against the U.S. dollar due to currency fluctuation may also impact its profitability going forward.
Over the last five years, GOL Linhas ADS's have traded in the range of 5.7x to 91.9x trailing 12-month earnings. Our $6.25 target price is based on 15.2x 2011 EPS. The stock currently carried a Zacks #5 Rank, indicating a Strong Sell rating.
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