Are Latin American Airlines Ready for Takeoff?

Jeremy is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There has been a huge decline in stock prices for two of Latin America's regional airlines that are publicly traded in the United States. The two airlines, Gol Linhas Aereas Inteligentes (ADR) (NYSE: GOL) from Brazil and Lan Airlines (ADR) (NYSE: LFL) from Chile, have all had big slides in their stock prices. This has meant a lot of pain for the shareholders of these two companies, but it could be a good opportunity to get in while the stocks have lower valuations. Both of these airlines have strong home markets, and they are also expanding to international destinations. This means that the airlines are growing and that their stock prices will eventually grow as well. 

Where do they fly?

Lan Airlines is a big player in the South American airline market. It flies all across the continent and to major markets in the United States, Europe and Australia as well. It recently merged with TAM airlines (a rival of Gol) and has several regional airlines (Lan Argentina, Lan Peru, Lan Ecuador and Lan Colombia). It has its main hub at Comodoro Benitez International Airport in Santiago, Chile and focus hubs at Jorge Chavez International Airport in Lima, Peru and Jose De Olmedo International Airport in Guayaquil, Ecuador. Lan has a lot more destinations outside of its home market than Gol does. 

Gol has flights all across Brazil and also to international destinations as well. Gol flies to all of Latin America, the Caribbean and the United States. It has its main hubs at Sao Paolo Congonhas Airport and Rio De Janeiro Galeão Airport with focus hubs at several other airports all across Brazil. Brazil is a much larger country than Chile so Gol flies a lot more domestic flights than Lan does. 

A long path down

Lan has had its stock price tumble, with the stock being down over the last month, the last quarter and year-to-date. The fact that the stock is down 28.2% year-to-date is the biggest indication of how far it has fallen. It is worrisome that the profit margin was negative this year and the return on investment and the return on equity were also negative this year. The fact that the stock price is toward its 52- year low means that it s trading at almost rock-bottom prices. In many ways, things do look bright for the future in that many of these issues are already priced  into the stock price, and there are areas for growth. 

On paper, Gol looks like it is doing even worse than LAN is. The stock is also down by significant amounts this month, quarter and year-to-date. Gol shares are down 48.9% year-to-date, which is certainly worrisome. The profit margins, return on equity and return on investment all look worse than for Lan airlines. Gol is also trading toward the bottom of its 52-week range. I believe that despite some of the grim numbers coming out of Gol's balance sheet, there is some good news that makes Gol a better pick than Lan. 

Both of these performances compare very unfavorably against Central American airline group Copa (NYSE: CPA), which is up 31.8% year-to-date. In contrast to Lan and Gol, Copa Airlines is toward the top of its 52-week range and looks like it could be overvalued. Copa already has had much of its growth priced into its share price and so it is very likely to decline in the future. On the other hand, Lan and Gol look like they have more growth left and so they are better picks for the future than Copa.  

The goal is higher share prices

Gol has a very rich home market that has been slowing recently, but there are still a lot of growth opportunities. Brazil is a potentially huge market for aviation and there is a lot of opportunity for profit from these customers. Due to Brazil's huge geography, aviation is by far the fastest way to get around the cities that are scattered across Brazil. Lan does not have as big a home market, which is why it has had to expand outside of Chile. Gol has much of South America under its wings as well the huge Brazilian market. That is why I believe that there is more opportunity for Gol to expand faster than Lan.

Where to go from here

The airline market in South America is experiencing some difficulties, but that does not mean there isn't room to profit in the future. It is easy to look at the recent slides in the stock prices and say that the market is broken. I believe that both Gol and Lan will have their share prices recover and that they will both experience growth. I believe that Gol will  go up faster than Lan but that they are both good picks for future growth. 

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Jeremy Worthington has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure