Copa Holdings and Lan: Best Airline Stocks Out There?

Includes: CPA, LTM
by: Erik Dellith

As investors poured over news of U.S. Airways Group's (LCC) bid for bankrupt Delta Air Lines (DALRQ.PK) this week, we turned to the Reuters screens to flag down opportunities in the sector. While no U.S. airlines made the cut, two from Latin America flew onto the radar. Panama-based Copa Holdings, S.A. (NYSE:CPA) and Chile-domiciled Lan Airlines S.A. (LFL) were found, respectively, on the Reuters Select Growth screen for Rising Expectations and the quality screen for Strong Operating Margins.

Although there is potential for a US Airways-Delta deal to ignite a round of consolidation within the industry, there is nothing to guarantee that this deal will be completed, particularly after a spokeswoman for Delta said the airline was focused on emerging from bankruptcy as a stand-alone carrier.

These dynamics led us to look for a carrier that has fast growth, attractive profit margins, little debt, and a reasonable price tag when stacked up against the industry averages. We started our search by filtering the 34 airlines in the stock universe and concentrating on the names that recently registered on a Reuters Select stock screen. This left us with two carriers: Copa Holdings and Lan Airlines.

Since we want airlines that are growing relatively quickly, we filtered for the company where the growth rate of earnings per share [EPS] is faster than the industry average over both the most-recent-quarter and trailing 12-month [TTM] periods. Both Copa and Lan soar over the industry norm.

Growth Rates(%) Copa vs. Industry Lan vs. Industry
EPS [MRQ] vs Qtr. 1 Yr. Ago 34.26 58.37 42.31 28.34
EPS [TTM] vs TTM 1 Yr. Ago 116.36 140.47 36.89 22.92

Taking a closer look at Copa's earnings, we found that the company's EPS beat analyst estimates in each of the last four quarters, satisfying a key requirement of the Rising Expectations screen.

EPS Surprises (In US Dollars)
Estimate Actual Difference
Quarter Ending Sep-06 0.79 0.87 0.08
Quarter Ending Jun-06 0.44 0.53 0.09
Quarter Ending Mar-06 0.51 0.75 0.24
Quarter Ending Dec-05 0.36 0.41 0.05

Both Copa and Lan also have operating profit margins that are wider than the industry norm in the TTM span. Even though Lan's advantage in the TTM period is much smaller than Copa's, Lan has generated industry-leading profit margins in both the TTM period as well as over the last five years. This laid the foundation for Lan to appear on the Strong Operating Margins screen, which requires that a company's operating margin eclipse the industry reading over both time periods. The screen also requires that a company's TTM results must be at least 25 percent better than its own five-year average. Lan's improvement is closer to 28 percent.

Profitability Ratios (%) Copa Lan Industry
Operating Margin [TTM] 17.93 7.56 7.04
Operating Margin - 5 Yr. Avg. NM 5.90 1.36
Pre-Tax Margin [TTM] 15.15 8.02 5.11
Pre-Tax Margin - 5 Yr. Avg. NM 5.68 0.10
Net Profit Margin [TTM] 13.87 6.72 3.71
Net Margin - 5 Yr. Avg. NM 4.78 -0.40

Copa and Lan also have relative debt levels that are south of the industry averages. As indicated below, both carriers have long-term debt to equity and total debt to equity ratios that are below the industry standards. Further, if you consider the relatively wider profit margins, it is not surprising to find that both carriers also have interest coverage readings that eclipse the industry norm. Interest coverage tells how many times a company's interest obligations can be met by its operating income; higher numbers are preferable to lower ones. On a relatively sour note, though, Copa and Lan have current ratios that are slightly below the industry average and less than 1.00. As the current ratio is calculated as current assets divided by current liabilities, this implies that these carriers have fewer assets that can be turned into cash within a year than they likely need to pay out to meet liabilities during this time.

Financial Strength Copa Lan Industry
Quick Ratio [MRQ] 0.76 0.76 0.81
Current Ratio [MRQ] 0.78 0.82 1.04
LT Debt to Equity [MRQ] 1.47 1.42 2.37
Total Debt to Equity [MRQ] 1.70 1.68 2.68
Interest Coverage [TTM] 7.50 4.86 3.45

We then turned our attention to valuation metrics. Here, also, both Copa and Lan meet our criteria of lower-than-average price to earnings (P/E) ratios.

Valuation Ratios Copa Lan Industry
P/E Ratio [TTM] 16.89 15.92 19.13
P/E High - Last 5 Yrs. NM NM 53.11
P/E Low - Last 5 Yrs. NM NM 16.13
Beta NM 2.25 2.20
Price to Sales [TTM] 2.34 1.09 0.76
Price to Book [MRQ] 5.67 5.24 3.03
Price to Tangible Book [MRQ] 6.68 5.68 2.16
Price to Cash Flow [TTM] 14.01 10.33 12.10
Price to Free Cash Flow [TTM] NM NM 11.99
% Owned Institutions 48.14 16.07 72.05

Copa and Lan also share another characteristic that allowed them to land on their respective screens: Upward revision in analyst estimates. Both the Rising Expectations screen and the Strong Operating Margins screen look for some improvement in analyst earnings estimates. Rising Expectations is stricter, requiring that the current-year consensus estimate must be above its level four weeks ago and that reading must stand above its figure from another four weeks prior. By comparison, the Strong Operating Margins screen looks for improvement over the last four weeks in the current-quarter EPS estimate.

Over the last two months, the consensus estimate for Copa's 2006 EPS stood at $2.62; today, it hovers at $2.81. Analysts have similarly penciled in higher figures for next year over this period, as the consensus has climbed from $3.07 to $3.33.

Analysts have been similarly busy with Lan. Over the last month, the EPS estimate for fourth-quarter EPS has climbed from 79 cents to 99 cents. Meanwhile, analysts have added to their 2006 estimates, taking the EPS consensus from $2.57 two months ago to $3.07 today. The EPS estimate for next year has improved from $3.08 to $3.72.

At the time of publication, Erik Dellith did not own shares of any company mentioned in this article. He may be an owner, albeit indirectly, as an investor in a mutual fund or an Exchange Traded Fund.

Note: This is independent investment and analysis from the investment channel, and is not connected with Reuters News. The opinions and views expressed herein are those of the author and are not endorsed by