Viva Monopoly

06/17/2009 9:38 am EST


Nick Lanyi

Editor, High-Yield International

Mexican airport operator Grupo Aeroportuario del Pacifico needn't bother with profit-sapping competitors, writes Nick Lanyi in High-Yield International.

Try to envision an environment in which one or two behemoth companies dominate an entire industry. The government is their largest shareholder, or was at one point. Then, imagine you can buy shares in these companies and stand side by side with a powerful regime as shareholders, profiting from the lack of competition. Throw in an exceptional yield and you've got what sounds like a dream investment.

Grupo Aeroportuario del Pacifico SAB de CV (NYSE: PAC) owns the 50-year concession to operate 12 airports in Mexico. Its airports are primarily located along the Pacific coast and sprinkled throughout central Mexico. This region includes major destinations such as Guadalajara and Tijuana, as well as top tourist spots like Los Cabos and Puerto Vallarta.

The lion's share of [PAC's] revenue, 80%, is derived from passenger landing fees, which are mandated, protected—and regulated—by the government. The remaining 20% comes from ancillary airport services like parking and leasing space to vendors.

The company is nearly debt free and generates copious free cash flow. The beauty of PAC's business is that its costs are mainly fixed—they consist primarily of basic maintenance of facilities and equipment. Once it covers those expenses, any revenue from additional passengers drops straight to the bottom line. That is behind PAC's sky-high 42% operating margin.

The more passengers travel through PAC's airports, the more cash flows to the company's bottom line. There is good news on this front—Mexican consumers are increasingly opting to travel by air rather than rail or by car. Domestic air travel through PAC's airports has been growing at a stable annualized pace of nearly 4% over the past three years. As Mexico becomes wealthier, more of its people can afford to fly.

But international tourism has been stronger, growing at an even faster 15%-plus annualized pace. PAC's airports along the Pacific Coast are popular destinations for American travelers. Even better, amendments to an air travel agreement between the US and Mexico will allow more carriers to fly routes into PAC's airports, including a number of low-cost carriers.
The recent financial crisis has slowed travel in Mexico from both domestic and international sources. The more recent swine flu scare added to the pain (as, obviously, did concern about drug-related violence—Editor.) However, the long-term up trend remains in place, and once economies and people around the world begin to recover, travel volumes will rebound sharply.

With PAC's monopoly position in six of Mexico's ten busiest airports, its future is far brighter than its stock price may suggest. Income investors looking for state backing by a strong national government should buy PAC under $25 to lock in a hefty yield. [PAC shares closed at $22.72 in New York Tuesday, for a forward annual dividend yield of 8.9%—Editor.]

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