GOL Airline Tough to Score

We are keeping our Hold recommendation on Brazilian low-fare airline Gol Linhas Aereas Inteligentes S.A. (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. Moreover, after the acquisition of VRG, it is in a unique position to become a true international player.

However, first quarter results were disappointing and the July 2007 accident at Sao Paulo and the restructuring of VRG will continue to undermine the company's results for the next few quarters. Finally, high oil prices and high worldwide inflation and interest rates, particularly in Brazil, are sources of concern.

Since its beginning in 2001, Gol has become the second-largest airline company in Brazil. The company has benefited from the strength of the Brazilian currency. During the first quarter of 2008, passenger traffic remained quite encouraging.

However, there is considerable inflation pressure in the last few months. During the first quarter, VRG returned seven Boeing 737-300s, replacing them with one Boeing 737-800s and one Boeing 737-700, all of them more modern and efficient aircrafts. During the second quarter, VRG expects to suspend flights to three international destinations. Additionally, the international business environment has been deteriorating in recent months.

On July 14, GOL and VRG announced that its cargo transport unit, Gollog, has signed a partnership with Emirates SkyCargo, the cargo division of Emirates Airline, to transport cargo to all destinations operated by the two companies. On July 10, GOL and VRG announced that VRG has signed an Interline Traffic Agreement with U.S.-based American Airlines.

Intuitive Leads Surgical Group

Without direct competition, Intuitive Surgical, Inc.'s (ISRG) main challenges to growth are overcoming the capital investment hurdle and gaining physician adoption for each procedure specialty. Stable or modest expansion in gross margin is expected in 2008 from continued improvements in manufacturing efficiency. Intuitive's earnings growth is also expected to eventually find support by the implementation of a tax strategy that involved a move to a new international sales office in Switzerland from France.

However, the company must continue to show value-add for customer capital spending, and expand physician acceptance. The broad use of Intuitive's products will require training of surgical teams. Market acceptance could be delayed by the time required to complete this training. Earnings growth may find some pressure from higher expected operating expenses to support growth.

At its current price of $322.07 per share, ISRG is trading at roughly 47x our 2009 EPS estimate and at roughly a 1.2x P/E/G on 2009 EPS, which is at a significant premium to the average peer group multiple of roughly 22x 2009 EPS and at a premium to the group 1.0x P/E/G. A significant premium is warranted on a P/E basis given the company's growth prospects relative to its peers and lack of direct competition.

We believe at this stage the majority of the growth prospects are already reflected in the company's stock price. If financial results fail to meet growth expectations, the stock price could be negatively impacted.