Flying to Mexico

05/19/2006 12:00 am EST

Focus:

Vivian Lewis

Editor and Publisher, Global Investing

"The devastation from last year’s hurricanes on the US Gulf Coast lives on; but as global investors, we also look at the damage wrought in Mexico," notes global investing experts Vivian Lewis and Frida Ghitis, who look south of the border for their latest buy.

"Last year, Hurricane Wilma devastated Mexico’s popular Riviera Maya on the Caribbean. The crushing impact of that monster category 4 hurricane pummeled not only the resort towns of Cancún and Cozumel, but it also razed the profits of Grupo Aeroportuario del Sureste, ASUR (ASR NYSE), operator of nine airports in southeastern Mexico. While the storm brought much misery, the region will recover. So this is a good entry point for profiting from the boom along Mexico’s south coast.

"Wilma hit the Yucatán Peninsula for about 30 hours on October 19. Damage to ASUR’s airports was severe, but insurance covered the costs. Still, its woes were just beginning. With most area hotels closed, travel—and profits—nose-dived. Q4 profits dropped a stunning 96.9% over Q4 2004, and passenger traffic continued to decline over the following months. ASUR reported its 6th consecutive month with year-on-year decreases in traffic for March, and the stock lost more than a quarter of its value.

"However depressing that sounds, ASUR has started recovering, because despite the bad news, the future looks as bright as a Caribbean sunrise. Before Wilma, ASUR--the first privatized Mexican airport group--was a stellar performer. With its monopoly of area airports, it can benefit from the return of tourists and expansion of Riviera Maya infrastructure. ASUR warns about profits for FY 06; but waiting for the end of the year may be too late for investors.

"Government authorities say Cancún and Cozumel, with the majority of ASUR’s traffic, are recovering, and hotel room numbers are near two-thirds pre-Wilma levels. The plan is to surpass pre-hurricane levels. Mexico’s Fonatur tourism authority wants to develop tourism beyond Cancún, where 65% of area visitors stay. It plans construction of another major airport, possibly near the Maya ruins at Tulún, and ASUR is one of the two project candidates.

"Meanwhile, ASUR did not lose its momentum with Wilma. The company is investing to expand the existing Cancún airport, which accounts for 75% of its passengers. Revenue per passenger increased 18%. ASUR’s price soared 400% in the 30 months from January '03 until the storm hit. Even though earnings dropped more than 90%, and the stock price dropped 25%, ASUR shares sell at 22 times earnings and the company is in solid financial shape, with minimal debt and strong margins.

"The key to growth is increasing passenger numbers and revenue per passenger. Both are likely. ASUR makes its profits from fees and services for airline operations, and in passenger commercial activities like food concessions and airport shops. More Cancún passengers and ASUR will likely benefit from the growing popularity of low-cost airlines. Even ASUR’s president is investing in one; Chico Pardo is becoming part owner in a new low-cost operation spearheaded by Brazil’s GOL Aerolinhas.

"Affordable travel to the Yucatan’s spectacular beaches will attract more Mexicans, Americans, and Canadians. And the rebuilt Cancún will have a higher proportion of five-star hotels. ASUR also owns an airport in the largely undeveloped southern portion of Mexico’s Pacific Coast, where the gorgeous beaches around Huatulco are inaccessible by road. ASUR owns the only airport in a region designated by Mexico as the next Cancún. If the goverment succeeds, adventurous travelers will have one less pristine area to explore, but ASUR will see profits blossom.

"Developing Pacific Coast operations would protect some operations from Caribbean hurricanes. Hurricanes remain a big risk for ASUR. Believers in an apocalyptic future of increasingly destructive hurricane seasons should not buy ASUR. Aside from overall market fluctuations, another risk is the second airport. If ASUR does not win the right to operate Tulún, it will lose its Riviera Maya monopoly. Still, barring more punishment from nature, ASUR management seems well connected and well qualified to lead it—and its stock price—to new heights."

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