Flying High with Mexican Monopolies

Although the political and social conditions in Mexico are pretty rough, sometimes that's the best time to invest in developing and even developed nations. Although you don't get the political stability you get with the US, Mexico does offer its perks, including huge monopolies. The greatest part about some Mexican monopolies is that they won't be regulated anytime soon, because they were created by the government.

A few years ago the government of Mexico sold off many of its airports to be run as private companies. Most of these companies have 100 year leases on the properties. Before you move on, I'm not talking about airlines, but the actual airports themselves. There are many positives from the deepening economy, but the pluses are to die for in a healthy economy.

-Because you don't get much of a choice in airports, they are basically the only game in town. No need to worry about a competitor opening next door, because since these are semi-government sponsored, the government would likely block any competing airports, if there even were any proposed to begin with.

-They are one of the best types of businesses a business can be, a toll road. These airports collect a commission for every flight, every day. That means a steady stream of income virtually at all times.

-They don't rely as heavily on energy prices or planes being full. Many of the problems that plague airlines have nothing to do with airports themselves.

-Most of these airports offer huge dividend yields because of their huge free cash flow. Not only will you be able to collect those, but capital appreciation will be huge once the economy returns.

The Three Candidates:

Grupo Aeroportuario del Pacífico (PAC): The largest Mexican airport, with a market cap of $1 billion, they engage in the operation, management, and development of airport facilities in the Pacific and central regions of Mexico. Owning 12 airports total, PAC has a profit margin of over 40% and over $100 million in cash. PAC shouldn't have any trouble getting through this recession and coming out stronger than before. PAC's $1.85 dividend yields almost 11%.

Grupo Aeroportuario del Sureste (ASR): The slightly smaller ASR serves the southeast region of Mexico, operating nine airports. They have about a 30% profit margin and are about 20% off their 52 week low of $24.55. Standing at $30.60, ASR's $1.39 dividend yields over 6.5%.

Grupo Aeroportuario del Centro North (OMAB): Although it operates 13 airports, OMAB is the smallest of the three with a $355 million market cap. OMAB's dividend yields a healthy 8.7%, but that is coupled with a -$0.22 EPS last quarter. OMAB is definitely the most beaten down of the three, but with good reason. On paper, their profit margins and cash cushion are smaller, but I think OMAB may have the best chance at surviving this recession most easily. Their airports are mainly in metropolitan and business areas that are less likely to see dwindling traffic volume when compared to tourist airports. Only three out of the 13 airports they run are tourist locations.

All three of these companies face significant challenges in the near future, but I think they qualify as outstanding long-term investments. Monopolies are good, but when they are actually sanctioned by the government, well, that makes them great.

Disclosure: I hold no positions in any security mentioned in this article.

Comments

[Ryan Vanzo:]

I will do my best to address any questions or comments anybody has about this article.

Thanks for reading,
Ryan Vanzo

Mar 24 11:32 AM

[anarchist:]

Thank for the info Ryan. I have traveled on Mexican carriers many times and they are always full and the airports very busy. My question is: why are the 52 week lows on these stocks you mentioned so low? What influences the drop in prices is the airports are busy all the time?
Thanks,

Mar 24 11:49 AM

[TheDetective:]

PAC experienced a significant drop on Feb 2006, and the stock hasn't recovered ever since. I wonder what were the driving factors for such decline.. Since this is a very stable, simple business I would wonder why the significant volatility.

Mar 24 01:38 PM

[Ryan Vanzo:]

anarchist & User 242303: I think there are many reasons that these stocks have seen such a beating lately. I think the 52-week highs were so high because some of them IPO'ed recently, and many investors were just buying into the concept, not the actual numbers yet. They then returned to equilibrium pricing, but were killed because of many reasons.

Why is the price so low now?
-Mexican turmoil, affects airports socially (rioting) and possibly politically. If there is a political change, they may override their previous agreements to the airport leases.
-Growth potential: These companies don't have much other business than what they have now. Even though they are a cash-cow monopoly, wheres the growth?
-And of course the usual, recession will cause less tourism and plane travel, although I think this fear has been overdone because most air travel is done by business people, who will be the last to cancel flights.

Mar 24 07:32 PM

[User 216486:]

The Peso has taken some hits recently. So, Mexican travel is a good deal recently. Those tourist airports should benefit.

Mar 25 10:30 AM

[Conan the B...:]

How about all of the Fear related to "abductions, murders, Barred windows and doors, firefights between troops and drug dealers, ditto police and drug dealers, decapitations, etc.".

This is on the news more frequently. I would hazzard that this has a great impact on tourism and the airlines.

Mar 26 12:18 AM

[razor604:]

PAC has suffered some declining passenger traffic because of the recession. They are not dependent on leisure travel markets like Puerto Vallarta. They have an airport in Tiajuana which is a major manufacturing hub.

The implementation of retail royalties on shops that rent space in the airport should offset some of the declining traffic numbers. The shops don't have much bargaining power since there isn't another airport in town to relocate to. This is a long annuity on a monopoly business since PAC still has 39 years left on its concession from the Mexican government to operate the 12 airports.

Mar 26 08:14 PM

[Ryan Vanzo:]

"Why is the price so low now?
-Mexican turmoil, affects airports socially (rioting) and possibly politically."

Read everything before you critique.


On Mar 26 12:18 AM paultaut wrote:

> How about all of the Fear related to "abductions, murders, Barred
> windows and doors, firefights between troops and drug dealers, ditto
> police and drug dealers, decapitations, etc.".
>
> This is on the news more frequently. I would hazzard that this has
> a great impact on tourism and the airlines.

Mar 26 08:57 PM

[Conan the B...:]

Vanya: "Mexican turmoil and rioting" hardly qualilify as being equal to what I wrote.

You understated the problems by several magnitudes. I merely described what your statement supposedly included as your reponse seems to indicate.

Do you then feel that what I said and what you wrote are the same thing? If so, what's your problem? If not, then, you should have. IMO

Mar 27 12:43 AM

[Conan the B...:]

Mr. Ryan Vanzo: Your profile states that you have posted Articles on "Fool.com and GuruFocus.com".

Since the Fool doesn't list you as a contributer, perhaps you used a different name. (sorry for using Vanya instead of Vanzo)

Meanwhile, GuruFocus.com listed two articles, each of which turned out to be a link to another site.

Mar 27 01:18 AM

[stocknerd:]

I live in Mexico near Guad airport. What with the drug cartels, the swine flu and earthquakes all looks doomed. GREAT TIME TO BUY.
Buy when others are crazy with fear and selling. Buy, buy, buy.

Apr 27 10:48 PM