Copa Holdings: Panama Profits

07/31/2013 8:00 am EST


Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

There are always good operators in even the worst industries. Therefore, I am recommending a leading regional airline based in Panama, says Gavin Graham, contributing editor to Internet Wealth Builder.

Copa Holdings (CPA), operates a fleet of 83 modern aircraft, with an average age of 4.3 years, consisting of 57 Boeing 737-700s, and 737-800s, and 26 Embraer 190 jets.

From its base at Tocumen International Airport in Panama City, it offers the most destinations and international flights of any hub in Latin America, including eight destinations in the US as well as Toronto.

Tocumen's convenient location, excellent weather, and sea level altitude contribute to Copa's excellent on-time record and its ability to act as the centre of a major hub-and-spoke operation, allowing passengers to reach any destination within Central and South America with only one stop.

Copa has expanded rapidly in the last decade. After going public in 2005, it used the access to public markets to grow and modernize its fleet. Also in 2005, it purchased the second largest Colombian airline, and now operates an extensive schedule of internal and international flights in that country.

Copa carried 10.1 million passengers in 2012, a 17% increase on the previous year, and experienced a 24% increase in capacity as it added ten new Boeing 737 aircraft.

With its rapid growth and profitable track record, Copa has far outperformed the S&P 500, returning 170% over the five years to the end of 2012, compared to a 12% increase in the index.

With its new membership in the Star Alliance beginning in mid-2012, Copa should benefit from increased traffic from members of other airline loyalty schemes in the alliance, especially the merged United Continental. As well, it has added new US destinations, such as Las Vegas in 2012, and Boston in 2013.

With the widening of the Panama Canal in 2016 forecast to add substantially to trade and visitors to Panama, and with the boost to its capacity through adding seven new Boeing 737-800s in 2013, it is reasonable to expect Copa's traffic to continue rising over the next few years.

Assuming that the airline keeps its costs competitive, and maintains its conservative policy of fuel hedging to offset the risk of higher prices, Copa should be able to maintain its margins at their present levels, and remain a profitable and successful airline, benefiting from the rising demand for air travel from the growing Latin American middle-class.

With earnings of $11-$11.50 per share projected for 2013, Copa is selling at around 12-times forecast earnings. It pays around 30% of its earnings as a single annual dividend in June of each year, giving it a yield of 1.7%, although it paid a dividend early in December 2012, to beat the change in US dividend tax law.

Copa Holdings is a buy for investors, willing to put up with the volatility inherent in airlines, as a play on growing air traffic and rising incomes in Latin America and the Caribbean.

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