Copa Holdings: Good Profits, Nice Valuation

I am not a big fan of airline stocks. As long as I have been watching stocks (30 years), outside of Southwest Airlines (LUV), they seem to spend more time losing money than making it. These are business with huge overhead costs that think nothing of slashing fares to win a bidding war or pick up a few points of market share.

When I took a closer look at Copa Holdings, Inc. (CPA), I found an airline company that actually seems to make good profits and the valuation looks pretty nice at these levels.

Copa Holdings consists of two airlines: Copa Airlines, which hubs out of Panama and serves all of the Americas and the Carribean, and Aero Republica, which puddle jumps around Columbia. The airline has a very young fleet of Boeing 737-700 and 737-800 and Embraer 190 aircraft. The multilingual website is easy to use and I find the company’s straight forward pricing to be refreshing. The prices for for flights stay consistent with different levels for different changeability/refund-ability.

Business class is also offered on all flights. Copa code shares with Continental (CAL) and the two airlines use the same frequent flyer program. Miles on Copa are the same as Continental and vice-versa. In the U.S., Copa has flights from NYC, Los Angeles, Washington DC, Miami and Orlando to Panama City for connections to the rest of Latin America.

Over the last year I have flown Copa several times between Los Angeles and Miami to South America. I found the service to be timely and efficient. Its Hub of the Americas in Panama could use another restaurant or two, but I do not think that is the airline’s issue. The connections worked well and I will definitely use Copa as my primary airline between South and North America.

Copa stocks trades on the NYSE. The market cap is $1.2 billion. All of the voting shares (about 30% of equity) are held by a single family. The stock is followed by half a dozen analysts. There are several reasons why I like this stock:

• The stock currently trades at only 10.5 times 2008 estimated earnings. The estimates for this year are only slightly higher than 2007 results, but this is a highly profitable airline and positive surprises are a possibility.
• Copa serves a growth area with excellent service and few competitors. The company’s fuel efficient fleet gives it a competitive advantage.
• The stock traded for $70 not long ago. A return to profit growth could easily put it there again.

As I said above, airlines scare me as investments, just look at yesterday's news about Continental and Southwest. I think Copa’s Latin America market and proven profitability set it apart.