CPA - Why It's Not Too Late To Get On Board With Copa Holdings

2023-08-01 05:12:14 ET

Summary

• Copa Holdings is an airline company based in Panama with a market cap of $4.5 billion.
• Copa stock is trading at a cheap valuation compared to its peers and the broader market.
• The industry backdrop for Copa is encouraging, with strong demand and record results from industry heavyweights like Delta and United Airlines.

Shares of Copa Holdings (CPA) are up nearly 45% year to date and are trading close to their 52-week high. After a run like this, it may sound like it’s too late to get on board with Copa, but the stock could still have plenty more runway ahead of it. Here’s why.

What is Copa Holdings?

Copa Holdings is an airline company based in Panama City, Panama. Copa operates a fleet of 97 aircraft and runs over 300 flights a day from Panama to 78 destinations in 32 countries in Central America, North America, South America, and the Caribbean.

Located on the isthmus that connects Central America with South America and with coastlines on the Atlantic and Pacific Oceans, Copa’s home base of Panama makes it ideally-suited to serve the entire hemisphere. This location is also favorable because the Panamanian government does not charge income taxes on connection flights.

Copa operates passenger flights as well as cargo service. Copa also operates a low-cost airline called Wingo that operates within Colombia and several cities outside of Colombia. The company was founded in 1947 and has grown to a market cap of $4.5 billion.

Copa has a strategic alliance with United Airlines (NASDAQ: UAL ) and is a member of the Star Alliance.

Economy Class Valuation

Even after this strong performance year to date, Copa still trades at a very cheap valuation. The stock trades at under 8 times earnings, and it looks even cheaper based on 2024 consensus earnings estimates, trading a mere 7 times earnings .

This mid-single digit earnings multiple is cheap no matter which way you slice it. It's a massive discount to that of the broader market -- the S&P 500 trades at 20.5 times earnings , nearly three times what Copa trades for.

Furthermore, Copa looks cheap compared to many other airlines. For example, large U.S. budget airline Southwest Airlines (NYSE: LUV ) is nearly twice as expensive as Copa, trading for 14.5 times earnings . Other U.S. budget airlines like JetBlue (JBLU) and Allegiant Travel Company (ALGT) are also significantly more expensive than Copa with double-digit price-to-earnings multiples. Copa’s valuation is roughly on par with that of Delta Air Lines (NYSE: DAL ), which is a bargain in its own right , and widely recognized as a best-in-class airline, putting Copa in good company.

This discount to its airline peers seems unjustified as Copa has amongst the best operating margins in the airline business at 18% , which are far superior to those of any of the companies mentioned above.

Copa also looks cheap on a price to free cash flow basis, with a P/FCF multiple of just 5.8 .

The stock even looks like a steal based on its PEG ratio of just 0.35 . Popularized by legendary investor Peter Lynch, PEG ratio accounts for a stock's earnings growth when valuing it by dividing its price-to-earnings multiple by its earnings growth rate. A PEG ratio under 1 is generally considered to be undervalued by investors who use this metric, so Copa’s PEG ratio of 0.34 means that the stock looks like a significant bargain by this measure.

Industry Momentum

While Copa's stock is still priced as if it is in an industry in decline, even after its YTD surge, the industry backdrop it is operating against looks encouraging overall, with plenty of tailwinds. Industry heavyweights like Delta Air Lines and United Airlines have been reporting record results -- earlier this month, Delta reported record operating revenue and record operating income, while raising its full-year guidance thanks to strong demand.

Meanwhile, United reported the highest-ever quarterly earnings in company history and also increased its full-year earnings outlook, also thanks to booming demand, especially for international travel .

Copa will report its second quarter earnings on August 10th, and while we don't yet know what they will report, I am optimistic. A nice thing about Copa is that it provides updates on its capacity and systemwide traffic on a monthly basis -- for April, system-wide traffic was up 15.6% year-over-year, for May, it was up 15.8% , and for June, it was up 14.9%. Last quarter , the company reported that revenue increased 51.7% year over year, and beat revenue and earnings expectations. The company is adding more planes to its fleet and expanding to new destinations in the U.S. (Baltimore and Austin) and Ecuador, so Copa looks well-poised to keep growing. During that earnings call CEO Pedro Heilbron said that "...we're off to a very good start in 2023 and expect to keep seeing a healthy demand environment throughout the year."

Copa's own momentum and the results of industry bellwethers like Delta and United Airlines give me optimism that it will post impressive results. Dividend

In addition to this attractive valuation, Copa is a dividend payer. Like many airlines, Copa stopped paying a dividend during the pandemic, so it was good to see it reinstated this year. So far in 2023, the company has paid out two quarterly dividends of $0.82 per share , so extrapolating out to the full year, Copa should pay out $3.28 in dividends this year, which would equate to a very respectable annualized yield of about 2.77% based on the current share price.

Taking Off

Looking at Seeking Alpha’s quantitative ratings, Copa scores highly across the board, with an A- for valuation, A+ for growth, B for profitability, A for momentum, and B+ revisions, so Copa is appealing to all styles of investors.

Furthermore, whether it’s Seeking Alpha analysts, Wall Street sell-side analysts or quantitative ratings, all three of these cohorts agree that Copa is a Buy.

With a rock-bottom valuation, strong fundamental performance, exposure to an attractive market, and what’s shaping up to be a solid dividend yield, Copa Holdings continues to look like an attractive investment opportunity and is one of my largest holdings.

For further details see: