A Mexican Monopolist Yielding 4.1 Percent

Aug.12.11 | About: Grupo Aeroportuario (OMAB)

By Stephen Mauzy

A few years ago, if I'd have said the official unemployment rate was below 5 percent, GDP growth was 4.5 percent annually, debt-to-GDP was 42 percent, and the citizens were generally optimistic, you probably would have thought I was speaking of the United States. If I were to repeat the same statistics today, you'd know I wasn't talking about the United States -- but you probably wouldn't know that I was talking about Mexico, either.

Our neighbor to the south is experiencing economic growth, employment rates, fiscal responsibility and confidence that used to be distinctions of our great country. Such enviable economic attributes, whether here or abroad, are difficult to overlook. This is why I see opportunity in Mexico, particularly in one company -- a monopolist in its market whose shares trade as American Depository Receipts (ADRs) in the United States. This company's ADRs are negotiable certificates that trade just like domestic stocks except that your capital gains, and dividends are priced in dollars, not pesos.

The company is Grupo Aeroportuario del Centro Norte (NASDAQ:OMAB), better known as OMA, an aeronautical management company with a market cap of $576 million. OMA holds concessions to operate, maintain, and develop 13 airports in Mexico, most of which are concentrated in Mexico's central and northern regions. OMA makes money charging fees to airlines, passengers, and businesses for the use of the airports it manages and maintains.

I find OMA intriguing for a number of reasons. For one, it can be likened to a utility in that its market is regulated, but it is the lone supplier in the market. Regulated monopolists are not only sheltered from many market vagaries, they are usually able to assure themselves a minimum level of profit. Unlike public utilities, though, OMA carries a much lower debt level. In fact, long-term-debt-to-equity is only 20 percent.

OMA is largely a play on Mexico's internal growth and prosperity. Only three of the airports it manages -- Mazatlan, Acapulco, and Zihuatanejo -- are international tourist destinations, and they account for less than 18 percent of passenger traffic. Its largest airport, in Monterrey, accounts for 46 percent of OMA's traffic. Monterrey is one of the three most important cities in Mexico for commerce and industry, and is Mexico's second-richest city behind Mexico City.

Mexico's swelling prosperity isn't so much reflected in total airline passengers as it is in a willingness for passengers to pay. In fact, the passenger numbers are relatively flat: OMA estimates that full-year 2011 traffic growth will be in the range 0.5 to 3 percent over 2010's total passengers of 11.58 million. Revenue, though, is expected to grow 8 to 12 percent over 2010's $214.2 million, thanks mostly to increased revenue generated per aeronautical client.

The recent sell-off of equities trading on U.S. exchanges appears indiscriminate. Over the past month, OMA has seen its ADR price drop 17 percent to $13.50. Yes, there are concerns that Mexico's economy could slow due to falling demand in the United States, which accounts for 80 percent of Mexico's exports.

In this global economy, no one operates in a vacuum anymore. But I think OMA is more insulated from U.S. woes than most Mexican firms. OMA's annual revenue has increased every year for the past six years, including 2008 and 2009, the Great Recession. There was some minor variance in net income over the time, but the trend has been mostly arithmetical and up.

The recent sell-off in equities has made OMA a value and an income-generating opportunity. At the current price, OMA ADRs are trading at 16 times the 2011 EPS estimate for $0.82 a share, which easily covers the trailing 12 month dividend payment of $0.65 a share. What's more, this payment has been raised each year for the past three years.

OMA is thinly traded, averaging only 10,500 shares daily. Therefore, the bid-ask spread varies, but is usually between $0.20 and $0.25. I suggest placing any trades as limit orders (one closer to the bid price for a buy). I have found that I am usually able to get better orders with limit orders than with market orders.