CPA - Copa Holdings: Pretty Clear Skies Ahead

2023-03-10 10:41:34 ET

Summary

• Copa Holdings reported a good quarter and full year for 2022.
• The 2023 outlook is positive and again sees the company earning significant profits at industry-leading margin levels.
• It seems likely that a dividend of some sort will be reinstated, and if it approaches similar levels as before COVID, would have Copa stock yielding in the ~3.5% range.
• Near-term performance may depend on the market and macro factors, but the long-term outlook for Copa remains bright.

I previously wrote about Copa Holdings ( CPA ), and the company recently reported its Q4 and full-year 2022 results . The company had another strong quarter, and while results were definitely influenced by changes related to the company's convertible notes, the underlying business continues to perform strongly as Copa stock tries to build upon its market-leading position through its Hub of the Americas in Panama City.

Review of 4Q 2022 results

Copa's success can be seen in many metrics, but perhaps the most prominent is its industry-leading operating margin, which topped the league tables amongst a host of global airlines:

The revenue side was strong for Copa, as it has been for many other airlines, with unit revenues and yields up double digits against 2019 levels. This was somewhat offset by elevated costs. The company continues to maintain a fortress balance sheet, with net debt/EBITDAR below 1.0x. In addition, its cash and short-term investment position is over $900 million, well in excess of its near-term needs and providing it with significant flexibility to deal with fluctuations in the demand environment.

2023 guidance and earnings estimates

In addition, the company provided its guidance for 2023, which was as follows:

• ASMs +12-14%
• 85% load factor
• Unit revenues (TRASM) of 12.1 cents
• CASM-ex fuel of 6.0 cents
• Operating margin of 17-19%
• Fuel price of $3.15 per gallon

Using a more conservative estimate of $3.50 per gallon for fuel, which is only 3% below 2022 levels, but otherwise aligning generally with management's guidance results in my estimates for basic EPS of $9.50-$10.00 per share and diluted EPS (assuming the exercise of the company's convertible notes into shares) of $8.00-$8.50 per share. Utilizing the company's forecast for fuel rather than mine increases my projections to $11.50-$12.00 and $10.00-$10.50 in basic and diluted EPS, respectively. This would peg the P/E ratio somewhere between approximately 9x-11x estimated 2023 earnings.

Share buybacks and dividends

The company has around $100 million remaining under its share buyback authorization. It sounds like, per management's comments, that it is reasonably likely that the company will reinstate its dividend at an upcoming board meeting towards the end of this month, which would be another sign of Copa's commitment to capital returns to shareholders. Based on my projections, the company should have substantial ability to reward shareholders in the coming years through some combination of dividends and share repurchases.

Conclusion

Prospects for Copa continue to be good. It has a combination of a strong business model and a balance sheet. Although leverage may increase slightly as it takes delivery of 737 MAX aircraft from Boeing, it should maintain net debt levels near to or better than its current ones before the impact of capital returns. Leverage will remain modest even with cash returns, leaving Copa with ample room to reinstate dividends and complete its current share repurchase program (and also authorize a new one if conditions permit). I continue to believe the stock is a Buy, though it has approached my initial price target. I will await a review of their 20-F when filed to decide whether to make any changes there.

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