Fly South with COPA Airlines

12/02/2014 10:00 am EST


Vivian Lewis

Editor and Publisher, Global Investing

Our new recommendation offers a way to play cheap fuel prices; it is a new buy-and-hold pick that offers exposure to the airline sector and to Latin America, explains Vivian Lewis, editor of Global Investing.

COPA Holdings SA (CPA) is headquartered in Panama and reports in the currency of that country, the US dollar. The shares trade at a discount at barely over 10 times earnings.

The stock is still waiting on the tarmac, despite handily beating the consensus analyst forecast, but failing to keep up with Q3 2013 profit and sales levels, both down by 14%.

Its adjusted net earnings were $99.8 million or $2.25/sh versus the consensus forecast of $66 million. The big reason is a drop in sales because COPA is unable to collect $500 million owed by Venezuela, a former flight destination.

COPA has excellent on-time performance and high passenger satisfaction rates. It currently runs 96 Boeing 737-800 planes to mainly American destinations, plus a couple of dozen feeder single aisle planes, which also serve the internal market in Colombia.

Its other major destinations are Mexico, Cuba, Ecuador, Costa Rica, and Guatemala.

Analysts are mixed on the company's outlook. IBES rates it a low-level buy (7 on 10) but Thomson-Reuters' analyst survey is closer to take-off, with half the experts rating COPA buy or strong buy and the other half rating it sell or neutral.

Our logic for buying is that the stock can gain altitude from lower aviation fuel prices. Its current revenue per seat is down 10% from last year, despite (or maybe because of) higher passenger numbers.

The price of aviation fuel, however, is now dropping along with that of the proverbial barrel of oil. Lower fares should cut costs and also increase bookings.

COPA plans to decouple its frequent flyer program from United Airlines by next summer and launch its own. This is one imponderable risk. The other is whether the oil price bust will continue.

And there is a third risk. S&P, which rates CPA a buy because of its positive earnings surprise, issued a warning on governance, which is why this stock is speculative despite its 3.3% current yield.

Offsetting that negative, about a third of the shares are held by US mutual funds and other institutional investors.

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