Copa Holdings Belongs on Your Radar List

Investors in Copa Holdings, S.A. (CPA) may have noticed an unusually high volume spike on Friday, May 16th. The abnormal trading pattern was a result of Continental Airlines, Inc. (CAL) liquidating the majority of its remaining position in the stock. The block was offered to investors at $35.75 and it was encouraging to see the stock absorbed by the market without further negative movement in the stock price.

CPA disappointed investors earlier this month when they reported earnings. It appeared investors were more disappointed with the treatment of Continental’s stock position than they were with the overall operating results for the company. Continental and Copa have had a longstanding relationship and at one time CAL owned 49% of the company. Despite that position being whittled down to now just over 1%, the two companies still honor contracts which are in place through 2015. The business relationship is expected to continue to be strong as both carriers benefit from the relationship.

Turning to the earnings results for the first quarter, CPA posted EPS of 0.91. This is a bit lighter than the $1.12 earned last year due primarily to higher fuel costs. Management noted an additional $21.7 million in fuel costs for the quarter representing a 35.1% increase. While some of these additional costs have been able to be passed on to travelers, margins are still being pressured by the relentless rise in fuel. The company’s guidance for operating margins has been dropped from 17-19% to a lower 15-17% which still places the airlines among the most profitable in the industry.

In April of 2005 the company purchased Aero Republica which is Colombia’s second largest carrier. Since that time, CPA has been working hard to restore the small carrier to profitability and is well on its way to transitioning the aircraft fleet from MD 80’s to more efficient E190’s. While the transition requires upfront capital, the savings over the life of the firm should more than make up for the hassle now. As a business unit, Aero Republica is expected to continue to post a loss for the first half of 2008, but will swing to profitability in the second half. In fact, the profits gained during the second half will likely be enough for Aero Republica to post full year gains instead of losses.

One of the major factors working in Copa’s favor is the thriving economy in Panama. Forecasts place Panama as the fastest growing economy in Latin America. As local citizens gain discretionary income to travel, and business men and women find it necessary to travel to the region, traffic should continue to expand. The company recently added Port of Spain, Trinidad & Tobago as their 41st destination and continues to increase the percentage of international flights. Since international destinations bring in stronger margins, this expansion should have a healthy effect on the overall firm.

The fact that Continental was able to complete its stock sale and the relative stability of the stock price point to better times for investors ahead. It may be wise to wait for more positive price action before initiating a long position, but the stock is one that belongs on any international investor’s radar list - oh, pardon the pun.

CPA Notes

Disclosure: Author does not have a position in CPA.

Comments

[Mizzou miles:]

"Since international destinations bring in stronger margins, this expansion should have a healthy effect on the overall firm."

Well, duh - Copa does not fly any domestic routes within Panama - the country is tiny and the few domestic routes (mostly to small islands) that even exist are served with small propeller aircraft! Hardly breathtaking analysis!

2008 May 20 06:29 AM