GOL Scores a Tie in Brazil

We are keeping our Hold recommendation on Gol Linhas (GOL). The company has been enjoying impressive growth in the Brazilian domestic airline industry for the last few years, and the short-term growth outlook remains quite encouraging.

It is important to note that 2007 earnings were highly affected by the infrastructure crisis in the Brazilian airports, a problem that showed a slightly improvement in the first half of 2008. Additionally, 2008 results are now affected by high oil prices. Gol remains one of the fastest growing airlines in the world and with the acquisition of VRG the short-term growth outlook seems positive.

We were very encouraged to see that oil prices have begun to move down from the US$150 per barrel peak recently. The reaction in the airline industry was prompt. This was great news for GOL; nevertheless it is too early to be convinced that the oil problem is over.

However, we do not consider the current valuation particularly attractive, even considering that earnings will be more reasonable in 2009 since it is likely that the situation in the Brazilian airports will improve.

Second quarter 2008 results were negative and it is important to consider the short-term problems after the July disaster in the Congonhas airport, the still high oil prices and the difficult economic environment throughout the world. Currently, Gol is trading at 11.6x our 2009 estimated EPS. We set a target price of US$10.00, representing a valuation between 12x and 12.5x our 2009 P/E, in line with the valuation of the Brazilian benchmark Bovespa.

Allied Waste May Benefit

An AP report this morning said that Waste Management (WMI), after failing to buyout rival Republic Services (RSG) for $34 per share, was again rebuffed by Republic for WMI's $37 per share offer.? A spokesperson was said to have indicated RSG preferred the earlier-proposed merger with Allied Waste Industries (AW).

Allied Waste is the only company of these three to have received much positive sentiment from analysts in the past month.? For the September quarter, 4 analysts have upwardly revised estimates, and 5 analysts have done so for their fiscal year estimates.? And now with Republic outwardly stating it would prefer a merger with Allied, perhaps we shall see more upward revisions.? Depending, of course, how favorable a merger with Republic would ultimately be.

Though coverage of Waste Management has had 7 increases for fiscal 2008 estimates, several more analysts have downwardly revised Q3 and Q4 expectations.? Part of the story has been that Waste Management is pushing its unsolicited bid merely in attempt to break apart a Republic-Allied merger.

Burlington Northern Chugs Along

Burlington Northern Santa Fe Corporation (BNI) reported 2008 second quarter diluted EPS before nonrecurring items of $1.34, up 18% year over year and $0.04 above consensus, but $0.08 below our estimate, as expenses came in higher than expected.

As a result, we are cutting our 2008 EPS estimate to $5.95 from $6.05, in line with the company?s earnings guidance of less than $6.00 per share. Our 2009 EPS estimate remains $6.90. We are continuing our Hold on the shares.

Strong utility demand and strong corn and soybean exports are expected to boost revenues going forward. Given the shortage of railcars, we anticipate freight rate hikes in the year ahead. Going forward, revenues should benefit from fuel surcharges and rate increases, partially offset by significantly higher unhedged fuel costs and flat to modestly lower volumes. BNI recently increased its quarterly dividend by 25% to a $1.60 annual rate, providing a 1.6% yield.

At its current price, the stock is trading at par compared to the industry median P/Es for 2008 and 2009, but is trading well above the industry median on price/book. Moreover, BNI?s PEG ratio (P/E divided by the expected earnings growth rate) now matches the industry median. Accordingly, we believe the stock is fully valued. We set a six-month target price of $103, or 15X our 2009 diluted EPS estimate of $6.90.

Turkcell Stays a Hold Near-Term

Turkcell Iletisim Hizmetleri A.S. (TKC) missed our estimates in terms of revenue and earnings for first quarter of 2008 although we were delighted to see operating expenses being much lower than our estimates.