- Centro Norte is likely to benefit from the expected increase in travel to Mexico.
- The stock is trading below the industry average, leaving room to the upside.
- Centro Norte's strong earnings growth can drive the stock to outperform in 2023 & 2024.
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Grupo Aeroportuario del Centro Norte (NASDAQ:OMAB) has a strong potential for significant stock growth in 2023 and 2024. The company is expected to benefit from increased travel to Mexico as the COVID recovery continues. The stock is reasonably valued with strong expected earnings to drive a chance of outperforming the broader market. The stock has a market cap of about $4.3 billion.
Centro Norte operates 13 international airports in cities throughout Mexico. The company provides aeronautical services such as passenger boarding/unloading, walkways, passenger aircraft landing & parking, and airport security services. Centro Norte also operates an NH Collection hotel in Mexico City and a Hilton Garden Inn in Monterrey. Additional services that the company provides includes: cargo handling, baggage screening, ground transportation, leasing of space to airports/restaurants/retailers/other tenants, construction services, and other logistics services.
Catalysts for Growth
Centro Norte is likely to benefit from the expected growth in travel to Mexico. International Traveler is projecting a 2.7% increase in the number of tourists in 2023 as compared to 2022. This would bring the amount of tourists to an estimated 39.4 million for 2023. This is still about 12.6% below pre-pandemic levels. So, there is still room for more post-pandemic recovery going forward.
Centro Norte also benefits from business travel within Mexico. The company obtained 1.9 million or 36% of passengers from business travel of the total increase of 5.2 million for all passengers for 2022. The company achieved this growth in business travel from 5 routes: Ciudad Juárez to Mexico City, Monterrey to Mexico City, Monterrey to Guadalajara, Monterrey-Cancún, and Monterrey-Tijuana.
The company opened up 31 new routes in 2022 with 20 of them being international. This should help drive more traffic and growth for the company this year and beyond. Centro Norte believes that there is room for strong passenger traffic growth as business opportunities in Mexico continue to expand.
Centro Norte achieved a record of 23.2 million passengers in 2022, representing 29% growth. The company should be able to build on this growth as air travel continues to recover from the pandemic.
Centro Norte is trading with a reasonable valuation as compared to its industry (Airports & Air Services). Centro Norte has a PE of 16.6 based on expected EPS of $6.53 for 2023 and a forward PE of 13.8 based on expected EPS of $6.53 for 2024. For further context, the S&P 500 (SPY) is trading with a forward PE of 18.8. The stock has room to move higher since it is trading below the industry and the broader market.
Centro Norte is expected to grow earnings at 35% in 2023 and 20% in 2024. Revenue growth is also expected to be strong with expectations of 19.7% for 2023 and about 12% for 2024. If this growth is achieved or exceeded, it is likely to drive the stock to outperform over the next two years.
Strong Profitability Metrics
Centro Norte has multiple strong profitability metrics which help drive earnings growth. The gross margin of 66% and net income margin of 33% are significantly higher than the sector median GM of 30% and net income margin of 6.6%.
The company has an ROE of 40%, ROIC of 20%, and ROA of 17%. These are all higher than the sector median ROE of 14%, ROIC of 7%, and ROA of 5%. These high returns help drive Centro Norte to achieve above-average earnings growth.
Balance Sheet/Cash Flow
Centro Norte has $171 million in total cash and $533 million in total debt for net debt of $362 million. I typically prefer to see companies with zero net debt (more total cash than total debt). However, having some net debt is understandable for a capital-intensive business like this.
The company has about $17 million more current assets than current liabilities and 1.6x more total assets than total liabilities for total equity of $439 million. The company was given a 'stable' credit rating by Fitch in February 2023.
The company had $255.8 million in operating cash flow in 2022. Centro Norte issued $269 million in new debt and repaid $141 million in long-term debt. OMAB paid out $339.5 million in dividends last year and spent $12.1 million on CapEx. Centro Norte was left with $73.4 million in unlevered free cash flow and $43.5 million in levered free cash flow.
Overall, Centro Norte looks like it can effectively handle its debt while investing in the business and rewarding shareholders.
The company has a choppy dividend paying history. No dividend was paid in 2020. Some years, OMAB only paid out one dividend for the year. However, the payments can be lucrative. For example, the company declared a special dividend which amounted to 8% in 2021. The company had three dividend payments last year. So, I would guess that there will be more dividend pay-outs announced this year as the business is performing well.
The stock has been rising on a strong uptrend in 2023. However, the price appears to be beginning to decline from a recent overbought level. There is bearish divergence between the stock price rising in March-April while the MACD (middle of chart) and RSI (bottom of chart) declined. This typically leads to further declines on a correction. The blue MACD line did make a bearish crossover below the red signal line, indicating a possible change in trend to negative. So, it may not be the best time to start a position. Investors might want to wait for the company to report earnings on April 26 to see how the company guides for the remainder of the year.
Centro Norte's Long-Term Outlook
Centro Norte has a positive outlook over the next few years as air travel in Mexico continues to recover from the pandemic. The new routes that the company opened up are likely to help drive revenue and earnings growth.
The main risk for Centro Norte is a possible recession which could reduce the demand for air travel. So, investors should listen closely to the next earnings call and any guidance that is given for future quarters.
The reasonable valuation and strong expected revenue and earnings growth should allow for the stock to outperform over the next two years. However, I don't like the technical set-up at the moment. So, I would wait for a possible near-term pullback and see how the company guides in the next earnings report.
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