The Downside to Insider Ownership (GOL)

Many people talk about how important it is to buy shares of companies that have strong family or management ownership, because that means there is someone intimately involved with the day to day operations who has the same motivation as common shareholders.

And I agree ... in general. But when a family or individual has a real majority of the shares, or a majority of the voting shares, you can sometimes get into trouble. So here we have a rare opportunity to hear a shareholder be a little bit grumpy about an event that has caused a one-day 10% move UP in one of his stocks.

Case in point ... maybe: Gol Linhas Aereas Inteligentes (GOL).

This is one of my favorite holdings, an upstart low-cost airline started by the family that ran one of the more successful bus lines in Brazil, and now the second largest airline in Brazil (they even bought out the old state flagship airline, Varig, for pennies on the dollar last year to get more airport slots and expand internationally).

Gol has been taking a beating over the past several months -- my shares are underwater by a little bit even today, after our 10% jump.

Why have they fallen? Well, the immediate cause was the crash of a TAM jet on a runway that caused restrictive rules limiting air traffic in Brazil's busiest airports, and limited bad weather flying (well, bad weather landing really ... but frankly, if you can't land most people don't want to fly). Before that, a crash of a GOL jet last year (not their fault) caused more of an uproar.

But both of those events were just symptoms -- the real problem is Brazil's civil aviation infrastructure, which everyone up to and including President Lula has recognized as an issue. The country's air traffic control, as in many other countries, is still run by the military, and they have not grown airport capacity or air traffic control capacity nearly quickly enough to absorb the huge demand for air travel spurred by Gol's low price tickets and the general boom in the Brazilian economy. Brazil, after all, is a pretty massive country physically, and the roads generally stink and they don't have a nice railroad infrastructure or other similar options ... convenient mass air travel is a natural evolution for them.

So what to do? Well, a bargain hunter would say that you can now buy shares of GOL for a significant discount to their real value, as the leading low cost airline in Brazil, and potentially a leading international and South American airline, because of these problems that are not specific to this airline.

Of course, you'd have to have a strong stomach because it's unclear whether the infrastructure problems will be solved in the next year or two, or at all, though I believe the government will see the sense in investing in this area and building a modern air traffic system and expanding airport capacity in the near future.

And, whether or not you have a strong stomach, it appears that the Oliveira family does. They're the founders and controlling shareholders in GOL, and they're apparently a little bit pissed (some of the family members, anyway) that the shares have fallen close to 50% from their highs.

I understand, believe me. But it appears that one tack they might take is to buy out the balance of the shares and take the company private, which is what is behind the 10%+ bump up today in both Brazil and the US. There was a good Bloomberg article about this just a little while ago, and an AP article that covered more or less the same ground.

So that's the risk I'm talking about: When someone owns and controls a company with a significant majority of the shares and voting power, they can sometimes take your shares out from under you even if you think the shares remain significantly underpriced -- the Oliveira family has all the voting shares, and owns close to 70% of the company.

And in this case, we have the added intrigue that apparently there's some dispute within the family about what should be done -- after all, even with the rapid share price decline in recent months, GOL has certainly enjoyed the cheap funding provided by the public markets that has enabled them to grow their fleet extremely rapidly with very little debt.

Now, I obviously don't know any more than you about whether or not this will actually happen, and I don't know exactly what the rules would be for a takeunder, how many folks would have to respond to a tender before the rest could be involuntarily bought out, etc. It's probably complicated by the fact that GOL has lots of shareholders in both Brazil and the US.

But I do know that If I wanted to sell my GOL shares, I would have done so (were I prescient and brilliant) when the price was in the high-$30s. I continue to believe, as the Oliveira family apparently does, that the long term potential is spectacular as long as Brazil eventually, preferably soon, cleans up the system that GOL has to work within. I don't want the company to take these shares from me at $25 or $30 this year, should that be possible ... and with such a huge controlling interest, it might be.

I'm still a fan of big insider ownership in general, of course, but it's not always entirely a good thing for other shareholders. Even in this case it might work out, since a going private buyout would at least bring the shares up somewhat from this level, and might even bring my shares into the black -- but for those, like me, who want to wait it out and see the recovery of the industry before considering selling, owning shares in a family-controlled company can mean that our options are not as many as we would like.

I own several companies that have large insider ownership positions -- John Fredriksen's Seadrill comes to mind, for example, but large ownership can perhaps give more benefits to individual shareholders when it's large minority ownership. Fredriksen, for example, generally owns about 30% of the shares of his companies, which is enough for him to steer the company and be incentivized to benefit common shareholders (and in his case, push for high dividends), but not necessarily enough, at least on paper, to allow him to do absolutely anything he wants with the firm.

We'll see how it turns out -- Gol has failed so far to take part in Brazil's remarkable stock market performance this year, but I'm confident that the shares are low for reasons outside the company's control. Unfortunately, my shares may soon be outside my control, too, so I'll just have to take the trust that I put in the Oliveira family and see where they decide to take me.

disclosure: Just to be perfectly clear, I do own GOL shares (at an average cost of about $27) and Seadrill shares (average cost of just under $15). I don't own any other stocks or companies mentioned above.

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Big Brazilian Aviation News (GOL)

Two big pieces of news that impact Gol in a positive way hit my screen after I bought shares on Monday ... a very rare case indeed of good purchase timing by me.

The first, rumors are now swirling (according to a Brazilian news columnist) that Gol is on the verge of buying Varig and keeping the nameplate for its international flights -- though others, including regional competitor LAN, are also likely to be interested. You can see the machine translated summary here or the original in Portuguese at the Veja Magazine site. A more recent summary is available from the AP. This could be very big for Gol, as Varig comes with a brand name and some very valuable international flight and airport "slots", but of course we'll have to see what it would cost and what their plans would be before judging the prospects. I'd trust GOL management to add more international flights, though I suspect they would continue to focus on the short haul international flights that they've already been expanding throughout Latin America.

And the second, I noted in my article that I thought the real reason for the GOL/TAM price war was the tough situation in civilian air travel right now, rife with delays and cancellations due to structural problems (not either company's fault). And I said I thought the cure for this would have to be a significant upgrade to the infrastructure, especially the air traffic control system ... but that the timing would depend on political will.

Now, at almost the same time I was typing that yesterday, President Lula exhibited a little bit of that political will -- he met with aviation heads (the air traffic control system in Brazil is still controlled by the military) and later announced, according to the AP, that he wanted a "deadline, day and hour to announce that there are no more problems in Brazilian airports."

Fixing the Brazilian air traffic infrastructure sooner rather than later would be fantastic news for GOL (and TAM) ... buying Varig may or may not be good, depending on the details ... and I'm still happy that I picked up more shares earlier this week.

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Bear Stearns Downgrades, Time to Buy (GOL)

I picked up a few more shares of Gol Linhas Aereas Inteligentes (GOL) yesterday, after a nice dip that was precipitated by a Bear Stearns downgrade and some very pessimistic comments by their analyst.

I've written many times about GOL in the past year or two, including a recent note that they were going on my "Conviction Buy" list ... but I haven't bought any shares in a while.

The prices we're getting now can't be ignored, however, and I've now bought just about all the GOL I can handle for my portfolio ... I picked up shares yesterday at $25.89, just a couple percentage points above the lowest price these shares have seen in over a year.

So what was the downgrade concern? Primarily, it's a fare war between GOL and TAM, the two dominant domestic carriers. The analyst sees this slashing profits, particularly in the fourth quarter when a lot of additional capacity comes online with new plane deliveries to both of these companies.

It's possible that Bear Stearns will be right in the short term (meaning, the next year or so), but I have my doubts. This company is so much leaner and so much better run than TAM (which is not a discount airline), that I think a fare war is probably not such a bad thing in the very long run.

GOL's goal, above all else, is to build a vibrant consumer air travel economy in Brazil -- something that is just in its first stages. And to bring people into the air and pull them off the buses that rattle along Brazil's unfortunate roadways, they use low fares.

A low fare airline depends on reducing costs and cutting fares to drive traffic, and on opening up a whole new market of people who never would have considered flying before because of the cost. That's what built Southwest and RyanAir to some degree, and it's even more significant in a lower-income country like Brazil -- the percentage of people in Brazil who have never flown in an airplane is dramatically higher than in the US or Western Europe.

So fare wars bring in new customers, and they also may allow GOL to take advantage of market share incursions against the larger TAM, in my opinion, because GOL has the financial wherewithal and the cost-cutting chops to keep fares lower, longer, than TAM. That's just my opinion, of course, it's possible that TAM's stronger hold on the business flier will help them hold off GOL, but I'm guessing not.

And more importantly, my supposition is that this fare war, founded as it is in a short-term desperation period for Brazilian civilian air travel, won't last long.

You see, in my opinion the major reason for the fare war is the terrible fall and holiday season experienced by Brazilian air travelers -- many people were turned off by air travel because of long delays caused by labor distress among the air traffic controllers due to overwork and anguish about being blamed for the GOL crash last year.

So it's not that the fare war came up organically because these two companies are trying to kill each other -- no, the fare war started because both airlines saw major traffic declines over a few months this winter, largely because air traffic delays made air travel unpalatable for many consumers, and had to do something dramatic and slash prices to get people back on their planes. I wrote a bit about this not long after the crash last fall here and also here, FYI.

I think this is a temporary issue, and that when air traffic control systems and staffing in Brazil are finally upgraded (which may take a couple years, I suppose, depending on political will), general consumer opinion about air travel is likely to improve to pre-last-fall levels.

And when that happens, whether it's next fall or next year or in a couple years, the marketplace can return to a more reasonable level of competition, which I think strongly benefits the smaller, nimbler, lower-cost GOL.

I don't trade much on shorter term issues, so it's possible that the shares will fall further -- but I would be surprised if they're not substantially higher within the next couple of years. At a trading PE of about 18 and a very large and growing market to address, I'm convinced that the shares are a very reasonable buy here -- the anslysts might be wrong on the estimates that give this a forward PE of about 10, but in the long run this is one of the stocks in my portfolio that I'm most convinced has a bright future.

disclosure: in case it's not obvious, I do own GOL and do not own any other companies mentioned here.

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What if Brazil Really Started to Grow?

With several investments in Brazil, principally the food company Sadia (SDA) and the airline Gol (GOL) I consider the country's prospects to be significant to my portfolio's future.

So, will Lula turn Brazil back into a huge growth engine while continuing to tame inflation and help the poor ... or will he, in trying to push additional growth, bring back the freakishly high inflation of the past and sink the Bovespa ... or will he, in trying to help all the helpless of Brazil, go too far injure the homegrown companies that have helped the country become significant on the international economic stage?

I don't know ... but I hope. Lula was just sworn in for his next term, and is now considered by many to be the most successful president in Brazilian history -- and he's certainly still popular, though perhaps not as much so as when he was more of a populist firebrand in his earlier years in office (years that gave Wall Stree the heebie jeebies, for the most part).

And while Brazil is a founding member of BRIC (or CRIB, if you prefer), the big emerging countries that stand as the bulwarks of the developing world (Brazil, Russia, India and China) ... it's certainly been, in recent years at least, the least followed one in that group.

Brazil has been the kid in the back row of the BRIC class, with much slower growth than India and China who sit up in the front and raise their hands all day long ... and thankfully, with more integrity than Russia, which, to continue the strained metaphor, is the kid selling cigarettes by the loading dock (you know he's got tons of money and all the chicks, but you're pretty sure you'd get burned if you got involved with him ... just ask your friends Belarus or Ukraine).

And really, if you consider that Brazil has grown at only 2.6% during Lula's reign in office, it seems odd to consider them to be part of this fast-growing emerging group at all -- except the stock returns have been sometimes spectacular, and the future might be more spectacular still.

Brazil doesn't have the massive population of China that makes all fiscal daydreams seem possible, nor the huge wealth of educated and English-speaking labor of India ... and they don't have quite the massive buffet of natural resources to snack at of the Russians. Really, in some ways all they've got is what the US had 100 years ago -- a growing, diversified economy based on cheap(ish) labor and lots of great arable land.

They have a large population of workers that are growing in level of education and, thank to the progressive policies of the government, slowly climbing out of poverty ... or at least, from really bad poverty into just plain run of the mill poverty. And that means they have, potentially, the second largest market in the Western Hemisphere.

And most significantly, for investors, is that the country seems to be hitting a sweet spot. Lula's regime has, by most accounts, tamed inflation. Ethanol and successful offshore drilling by PetroBras mean they're less subject to oil shocks than many markets. And because much of their trade is in agriculture and other natural resources, they might not be as susceptible to a dip in US or Japanese or European demand for finished goods the way China, India, Taiwan or Korea should be.

But make no mistake, Brazil is still a risky place to invest -- and my investments are primarily domestic in nature in Brazil, since it remains to be seen whether they can become an important player in multiple industries the way China has.

But it seems that Brazil does have, at least, a population that is slowly becoming better off, a good handle on inflation, and political stability -- that's something, and if they just continue on the path to development there will be plenty of money to be made even if they don't catch fire in quite the way their more popular (or notorious) BRIC brethren have of late.

In addition to my investments in Brazilian agriculture and airlines, which depend primarily on a building domestic and regional market, I'm intrigued by Lula's promise to liberalize financial markets and make investment in Brazil easier as a way to help spur some growth. This brings to mind a few companies that might benefit.

The first ones that come to mind with that environment are the banks, of which Brazil has two biggies that are traded in the US in Banco Bradesco (BBD) and Banco Itau (ITU), both of which have been awfully successful (though BBD has a bumpier chart than ITU). I don't know a lot about those companies, but I'm not terribly interested in investing in a bank at this point.

And second is the investment banking business ... the investment houses all have interest in Brazil too, of course, including Goldman Sachs and all their Wall Street brethren ... but the one that stands out for me in Brazil is a Canadian company, Brookfield.

Brookfield Asset Management (BAM), which I looked at for a few minutes when I was pondering the next Berkshire Hathaway, has a surprisingly high (and growing) level of involvement in Brazil (and has for most of its history) -- which intrigues me. They recently IPO'd a homebuilding business on the Brazilian exchange, which if financial markets and mortgages are going to be liberalized might be one of the more prescient moves of late, and they have a growing interest in Brazilian commercial real estate. It really feels to me at times as though Brookfield is becoming the Macquarie bank of the Western Hemisphere -- and if so, that would be fine indeed for BAM investors.

I don't know if I'm ready to become more exposed to Brazil than I already am -- I think it's unlikely that I'll invest in another Brazilian company at this point, but the more I've looked at Brookfield in the past few months the more I like it ... I just wish the valuation was a bit lower, but perhaps I shouldn't get hung up on things like reported earnings when the company has such a vast portfolio of assets ... including some juicy ones in Brazil.

full disclosure: I own shares of Sadia and Gol as of this writing, and LEAP options on Goldman Sachs. I don't own any other companies or investments mentioned.

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Gol refuses to fall (GOL)

I've been watching shares in Gol Linhas Aereas Inteligentes (GOL) for a few weeks now, waiting for them to fall in the wake of their reduced guidance and the terrible problems that are lingering for Brazilian aviation thanks to the crash a couple months ago and the fallout thereof.

But it hasn't happened, at least not to the degree I'd like to see. Late last week, in fact, the shares rallied a little bit.

It looks like GOL shares right now are pricing in more optimism than I really think is warranted in the short term -- I've been optimistic about this company for a long time now, but I wish the market would take a bit more critical eye and trade the shares down so I could fill out my position with one more bargain purchase.

What's wrong with GOL? The Brazilian air traffic controllers have been in a bit of a work slowdown since being blamed (by some) for the recent crash of a Gol flight with an Embraer business jet that killed everyone aboard the Gol plane. Gol is likely to get sued by someone, and it's certainly true that this tarnishes their brand a little bit and will cost them money (though they're insured) ... but there hasn't been any indication that the airline or its pilots did anything wrong.

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So the problem isn't with Gol specifically, but with Brazilian air traffic in general -- TAM and Varig (what's left of it) are suffering too.

Air traffic control has gummed up the system by "working to rule" and causing delays for nearly every flight, which is cutting back on the appeal of air travel and on the efficiency of Gol's flight planning -- and that, in turn, is going to reduce results, at least until they bring the air traffic control system up to full capacity and expand it to meet the growing demand.

Now, I can live with this -- I've seen the reduced guidance that Gol gave when they realized the impact that the gummed up air traffic control system would have on their earnings, and I wouldn't be surprised to see them have to reduce guidance again if the problem lingers. I've got a multi-year time horizon on this investment, and in the long run I think the potential for growing South American air travel is spectacular.

But I was really hoping that this would drive down the share price. While I was looking into Brazilian stocks a week or so ago, when I made my initial purchase of shares in Sadia, I came very close to upping my Gol holdings as well ... but I've been greedy, hoping that this temporary problem would create a fire sale.

And as recently as Friday, GOL blipped up again -- presumably because the government has now charged the Embraer jet pilots in the crash, which perhaps could create a scapegoat that would take the pressure off the air traffic controllers and allow them to get back to work.

Still, I'll hope for further declines -- with the lack of investment in their aviation infrastructure over the last decade as traffic has steadily climbed, it's going to take more than just a return to normalcy for Gol's growth to continue. What is eventually needed is a significant investment in expanding air traffic control capacity, which may or may not mean moving control away from military control (I don't know enough about the situation to know whether or not that is important).

Hopefully, sometime in the next few months the sector will be hit hard with the results of a national air travel slowdown ... if so, I'll plan to be ready to buy.

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Happy Sadia Investor (SDA)

I opened a position in Sadia SA (SDA) today, purchasing shares at $30.60.

Sadia is a Brazilian food products company, primarily producing and selling pork, chicken and processed refrigerated/frozen foods. They've had a tough year thanks to some problems with the strong Brazilian currency and weakness in some of their exports (the avian flu outbreakand resultant dip in poultry demand, and a Russian ban on Brazilian pork were negatives in the recent past) ... but management believes that the recently completed third quarter is the beginning of their export and sales growth rebound, and I'm inclined to think they have a good future ahead of them. The shares, while not at their lows, are nicely priced.

Brazil has some natural advantages in this business: inexpensive and available feed grains, inexpensive labor, a good agricultural climate, and a large number of farmers. Sadia has relied on that combination of factors for many years in building both a dominant food company in Brazil, and a significant export business to the rest of the world.

And the meat and processed foods businesses, I believe, have some significant tailwinds for the years ahead -- regardless of the success of Whole Foods and the organic foods movement in the US and Europe, I think the trend is definitively pointing toward much higher consumption of processed and convenience foods worldwide -- more people are working, fewer are farming or living near farms, and convenient refrigeration continues to spread to growing lower middle class areas in Asia, South America and elsewhere.

Add that to the fact that higher standards of living internationally almost certainly will bring higher protein consumption, as they have in the past, and I think meat and frozen convenience foods are good investment opportunities. The global trend for meat consumption has it increasing at 2% a year overall, and already we're seeing eye opening statistics -- including the fact that China now consumes half the world's pork. Meat consumption has climbed something like 500% over the last 50 or so years, and I don't expect to see that trend reverse itself in any meaningful way. That's likely to be quite bad for the environment and for global sustainability, given the inefficiency of a higher protein diet and the dirtiness of the typical factory farm, but for investment purposes that concern is largely incidental.

The company's sales are roughly evenly divided between domestic consumption and exports -- exports are a bit low at 44% of the total for the most recent quarter, thanks to the problems I noted above, but management during the conference call definitely noted that they see the balance returning to the 50/50 margin they prefer.

Domestically, Sadia is primarily a seller of frozen and refrigerated processed food -- everything from frozen chicken nuggets and pizza to ice cream and margarine, including some products like chicken carrot lasagna and cheese chicken burger hot pockets that I can only assume sound better to a Brazilian than they do to me.

The export business, in contrast, is largely in lower-margin products like chicken parts and commodity poultry and pork products. They're slowly adjusting that and trying to market their value-added processed foods in foreign markets, with particular focus on other South American countries and on the Middle East.

Sadia management sees continued opportunity for margin growth as they build and invest in their business, with a goal of seeing EBITDA margins increase to 17% by 2010 -- that would be pretty remarkably high for this business, and Sadia's operating margins are already significantly better than many competitors, including US based companies like Tyson or Smithfield (Sadia doesn't really export to the US on any meaningful level, though that might change with a free trade area for the Americas still possible, so comparisons might not be very useful). Gross margins slid dramatically earlier this year, as the fall in the stock price indicates, but have already begun a rebound and ought to return to their historical levels in the high-20s.

The company has a pretty high debt level, but with continued solid sales and growth I think that ought to be manageable, and the debt is helping to finance needed expansion. Right now, as the company believes they're on the cusp of recovering sales and margins, net debt to equity is at 53%, a touch above the board-mandated maximum of 50%.

There is also always a possibility that Sadia will make big acquisitions either domestically or internationally -- they tried and failed to take over their major competitor Perdigao earlier, and have been trying to build up their pork and beef operations, partly as a way to diversify away from potential avian flu exposure.

As with other Brazilian companies, Sadia pays out a minimum portion of earnings as a dividend to shareholders as required by law. The dividend is subject to Brazilian taxation and fluctuates significantly based on the performance of the business, but the TTM dividend rings in at well over 4%, and I expect to see a yield at least equal to that going forward.

I'm planning to hold this position for a long time, and hope to buy more at lower prices if there are further avian flu or similar short-term concerns. The opportunities for increasing sales of processed foods to the growing economies of South America, and the likelihood of increased protein consumption worldwide provide some real opportunity for a company that I think is value priced right now.

As with my investment in Gol Linhas Aereas Inteligentes (which I'm also considering adding to in the near future), this is in part a bet on the growing Brazilian economy. Rising minimum wages and inflation that is (hopefully) under control should allow for more consumption of prepared foods as well as cheap airline tickets in the biggest country in South America, but the risks with this volatile economy are certainly nothing to scoff at -- continued strength of the Real can hurt their export performance, and a return to high inflation or a wildly populist turn by the government (neither of which I expect) might be disastrous. On the flip side, one of the cabinet members is the former head of Sadia, so I'd imagine the company has a significant voice in the government.

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Gol Cuts Guidance Following Crash (GOL)

So, it turns out that plane crashes are a big deal in Brazil, too.

Today, Gol Linhas Aereas Inteligentes (GOL) reduced guidance for the coming year as a result of problems with air traffic delays and reduced passenger demand following (though not directly caused by) their recent crash.

The new guidance for the current year is for a minimum of $1.73 a share, which gives us a PE of about 16 -- still reasonable, but significantly lower than the prior guidance.

For those who didn't hear, a GOL jet on September 29 collided with a small Embraer business jet from ExcelAire charters that was on its maiden voyage, on its way to being delivered to NY. The investigation of the crash has been inconclusive, but a major factor was that the Embraer jet -- a small northbound jet -- was at the altitude typically reserved for, and assigned to, the southbound jumbo jet traffic. Dozens of radio calls apparently went unanswered right before the crash, and neither plane's anti-collision system issued alerts. The Gol jet crashed, killing everyone aboard, but the Embraer's pilots were able to safely land their plane with relatively minor damage.

There are two upshots to this for GOL as a business concern -- leaving aside the humanitarian disaster, which I think Gol has handled very well in communicating with the families of all those involved.

One is that Gol is a bit tarnished as a result of the crash of their plane. It seems to me that this is likely to blow over, since of the three parties involved (the Gol pilots, the Embraer pilots, adn the air traffic controllers), the blame has so far ricocheted back and forth between the Embraer pilots and the air traffic controllers.

I haven't seen anything that indicates that the Gol pilots did anything wrong, and it's a clear case of a collision and not a defective part (except possibly for the collision warning system) or a deferred maintenance problem or something else that would tarnish Gol specifically (and GOL flies one of the youngest fleets in the world, so while they're a discount airline they're not flying beat up planes). Unlike the Valujet crash in the everglades 20 or so years ago, I don't think this is likely to precipitate the fall of the company (or lead Gol to try to hide by renaming itself).

And the second problem is probably longer lasting, and more easily quantifiable. That problem is that the air traffic controllers in Brazil are staging a bit of a protest of their working conditions, which some argue led to the crash, by doing what they call "working to rule" -- which means following the letter of the rulebook and, one presumes, not stretching their shifts or doing overtime or whatever else they might do to ease the pressures on the system.

That has brought signficant delays as the air traffic control system has been forced to cancel some flights and delay others, to the extent that some officials say the system has dropped to half capacity (others deny a significant problem), and nearly half of all flights are now delayed, with 1-3 hour delays not uncommon. That's why Gol issued new guidance, since they're already seeing that this is reducing customer demand to some degree.

And in some broader ways this is Gol's fault, too -- they have democratized the skies by slashing prices to be competitive with long bus trips, and in doing so dramatically increased demand for air travel, which means many more planes share Brazilian airspace now than five years ago ... which means air traffic controllers are overtaxed.

Officials have been quoted as saying that the delays are likely to last until the middle of next year as the system staffing is built to a more appropriate level. That's an awfully long time, and it's likely to continue to depress GOL's earnings a bit from the levels they might otherwise have attained -- current guidance for 2006 is a drop of anywhere from 5-15% from the guidance they had previously issued, so although GOL has not commented in detail on 2007 I would not be surprised to see that forward PE climb a bit from where it sits now at about 12.

What else is likely to happen as a result of this crash? There's certainly the potential that Gol will be blamed -- it was, after all, their plane that crashed, and their passengers and employees who were killed. I haven't noticed Gol named in any lawsuits yet, though the other plane's pilots have been, as have some of the manufacturers (Honeywell, for one, which I presume designed the collision detection equipment or other relevant cockpit gear).

The official government report has so far assigned no blame in the crash -- they said that a flurry of communication between all the parties occurred directly before the crash, but didn't lay blame on anyone ... but the two American pilots of the business jet have had their passports taken away while the investigation continues, and it's certainly in the Brazilian papers with some regularity.

But in my opinion, we're looking at a very unfortunate bump in the road for Gol. Gol is a play on increasing demand for air travel in Latin America -- pure and simple. So in the short term, as demand is depressed due to the air traffic control problems, and potentially due to the public fear of flying (well, fear of crashing, really), the performance of the company will suffer. In the long run, my expectation is that GOL will continue to grow dramatically and put all those shiny new Boeing planes that they have on order to work.

full disclosure: I do own GOL shares as of this writing.

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Gol maintains altitude (GOL)

I haven't written much about Gol Linhas Aereas Inteligentes (FARO) in the last couple months. It's been a fairly quiet summer since the drama of Varig's slow demise held my attention through the World Cup, with Brazilian soccer fans stranded in Germany thanks to Varig's inability to make payments on its leased fleet, and the Brazilian courts struggling through their first high profile bankruptcy case under a new set of laws.

But Gol's business has continued to be rock solid. For those who don't know, Gol is the second largest airline in Brazil (the largest is TAM), and is benefitting both from the rapid growth of air travel in South America and in its own competitive position as a low cost carrier in the mold of Southwest Airlines. TAM is also doing well, but I like the high insider family ownership in GOL, their excellent investor relations and disclosure policies, and the fact that they're a newer, more focused competitor (TAM has been around for much longer, though they've also in recent years moved to a discount model).

It's really a two horse race in Brazil now, with Varig, the former flagship carrier, essentially trying to be reborn as a startup ... and there may be more than one winner. Both TAM and GOL should benefit tremendously as the civilian air travel industry there grows by leaps and bounds. According to an Investors Business Daily article earlier this week, there are fewer than two airplane trips taken for every one hundred Brazilians each year -- as opposed to the US market, where each individual takes an average of more than two trips a year. Clearly, Brazil has great room for growth in this industry as their economy grows ... if they even grew to travel by air as often as Chileans, that would be more than a tenfold increase in air traffic in Brazil.

But none of that is news -- what's been going on with Gol lately, as their share price has more or less stagnated over the past six months?

Three developments have left me with continuing optimism about my GOL investment:

1) They're continuing to cut costs aggressively. They recently opened a new maintenance center so they can do their own servicing and stop paying third parties, which they believe will save them $2 million a year. Add that to the declining oil prices, and margins should continue to be excellent (they already have second-to-none profit margins).

2) They're continuing to steadily branch out and build their network into underserved areas of Brazil and neighboring countries, using the same low-cost, point-to-point strategy that has served them so well to date. GOL now flies to Argentina, Chile, Paraguay, Uruguay, Peru and Bolivia and is trying to expand to Mexico, Venezuela, Colombia, and Ecuador (the Mexican expansion, which would require building a domestic fleet in that country which is just now opening up to low cost competition, is on hold as GOL decided this summer to focus on South America for the time being).

3) Even as they bring new capacity online -- they're buying 20+ new planes this year, and the year-over-year seat miles have increased 45% -- they continue to build their efficiency as measured by the load factor (the percentage of available seat/miles that are filled). In July, that load factor hit an unbelievably high 84% as the grounded capacity of Varig continues to be absorbed. That high a number might not be sustainable, but they report it monthly and it has consistently been excellent. August, while significantly lower than July at 77%, was dramatically better than the 66% they hit in August of last year. I was a little worried that the buildout of international routes would hurt this performance, but clearly it hasn't as the company has focused on high-traffic routes and managed them very well.

4) Though prizes don't mean much on their own, GOL continues to win industry prizes and high rankings among their peers, and they stand out as one of the strongest companies in the developing world. They consistently win accolades for their investor relations and disclosure policies, as well as for their exceptional business performance, and the company is clearly proud of their status as a highly ethical leader in the marketplace. A few recent examples from just this past Summer are awards or high rankings from Latin Finance, Aviation Week and Space Technology, and the Brazilian Economic Institute.

GOL has underperformed the larger (and more international) TAM since the latter came public this past Spring (as you can see from the six month chart below), but I continue to be a believer in GOL's high insider ownership, strong track record of cost cutting and aggressive price cutting that is helping to expand their market, and excellent management.


GOL remains one of my larger holdings, and the only thing that is likely to change that would be a sustained recession in Brazil.

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Best Management?

A reader emailed today to ask what I think about Berkshire Hathaway, and, more generall, which management teams most impress me. I thought I'd answer for everyone in case anyone else is interested.

Berkshire Hathaway is still in my portfolio, and has been for about a year and a half ... but it's at roughly the same price today as it was when I bought it. I have the utmost respect for Warren Buffett, and I'm pleased that they have further clarified the Berkshire succession plan.

I like Berkshire because Buffett has done more with "free money" than anyone else -- his use of the "float" to fund long term investments has clearly been brilliant, as evidenced by his trouncing of the S&P 500 over the last several decades. My position on Berkshire is that I expect it to continue to plod along, acquiring solid companies and using their clout to be the insurer of last resort for many high risk enterprises, at significant profit. But I don't expect any rapid growth -- my fear is that Berkshire will end up so large that it effectively works as an index fund with cheap leverage from the insurance float, and even that is a fine scenario. With new money today, however, I'd be more tempted to put additional funds into Markel, as they have the kind of potential growth ahead of them that Berkshire had 25 years ago, assuming they make the right decisions ... Berkshire just can't grow that fast anymore.

And as for management -- perhaps it would be simplest to just list some of the things I like about some of the managers I trust the most:

In terms of trusting someone to make investment decisions for you, I do think it's hard to go wrong with Warren Buffett -- but if I ever sold my Berkshire shares and wanted a similar value-investing exposure in my portfolio I would have no qualms about giving the money to the investment team at Dodge and Cox Stock, which I already have some retirement money invested in, or with Martin Whitman at Third Avenue Value, who I would consider the single smartest long term stock picker available right now (but he's nearing retirement, too, I expect).

In terms of sharing information fully with investors, and making small investors feel they are on the same page as the management team, I'd trust the Oliveira family, controlling shareholders of Gol Linhas Aereas Inteligentes. Without playing a self-serving game with analysts to lowball and then beat their projections, they manage to clearly open up the books and explain their business, including monthly updates on their business performance -- it's rare for an American company to do that with such enthusiasm, and it's rarer still for what most would consider to be a risky emerging market investment.

Another thing I like to see from management is insider buying -- it always encourages me when executives put their own money, not options, into the company they know best. Of course, they know that, too, so it can be self serving ... but when executives aggressively purchase their own stock I think we'd be wise to follow. On this point, it's worth taking a look at Chesapeake Energy, of which I own preferred shares, and see CEO Aubrey McClendon buying up well over a million shares on the open market in the last couple of months at prices right around where it stands today (mostly higher, in fact). Add to that the fact that he has led the company to make strategic natural gas acquisitions now, when prices are relatively low and pessimism high, and I think you have the makings of a manager who's looking out for the long term interests of shareholders.

There are others