In my search for stable companies with growing earnings and trading
at a discount, I found
Copa Holdings SA (
. The airline company has been steadily growing throughout the
years. The value of the stock has been increasing along with the
company's growth until this year. There is now a disconnect between
Copa's growth and the movement of its stock. The stock is now down
10 percent year-to-date while its earnings are up 35.5 percent for
the past twelve months. One thought is that the stock has outrun
its earnings and was due for a pullback, but it is only trading at
a P/E of 13.20. I decided to take a closer look at the company to
see if its stock was worth buying.
Copa is one of the main airline companies in Latin America
providing airline passenger and cargo services. It is headquartered
in Panama City, Panama. It operates with a spoke and hub strategy
with the hub centrally located in Panama's Tocumen International
Copa was first established in 1947. In 1998 Continental Airlines
purchased a 49 percent stake in the company. In connection with the
investment, the two companies entered into an extensive alliance
agreement providing for code-sharing, joint marketing, technical
exchanges, and other cooperative initiatives between the airlines.
Since 1998, Copa has grown and modernized its fleet while improving
customer service and reliability. The company has gone from having
a fleet of 13 airplanes to fleet of 90 airplanes today. Continental
began reducing their ownership in 2005 and sold off their remaining
stake in 2008. 2005 is when Copa's stock went public, and it has
increased 484 percent since then. That same year the company also
purchased AeroRepublica, the second largest carrier in Columbia.
The company now has 69 destinations in 30 countries and is
continuing to expand. Copa Airlines also provides passengers access
to flights to more than 120 other destinations through their
codeshare arrangements with United Continental.
The hub of Copa, Tocumen International Airport, is the only airport
in Central America with two runways for use. It has also been going
through stages of expansion and renovation throughout the past
decade. The latest expansion plan to build a new south terminal is
38 percent complete and expected to be finished in 2016. There are
currently 34 gates and the new terminal will add another 20 plus
another runway. There are future plans to add an additional 10
gates. Of the gates at Tocumen, Copa controls over 80 percent of
them. Panama has been the perfect hub with its central location to
provide flights to North America, South America, and the Caribbean.
Panama also has the fastest growing economy in Latin America, and
it is growing as a regional headquarters base for many
multinational companies such as Caterpillar, Procter & Gamble,
Unilever, BMW, Nestle, and many others.
It would be difficult to find a company that is more solid when it
comes to its financial statements. Copa ranks a 4/5 for Business
Predictability, 9/10 for Financial Strength, and 10/10 for
Profitability and Growth. The balance sheet is strong with enough
cash to cover its long-term debt. As of the latest quarter, the
balance of cash and cash equivalents was $1.132 billion and the
long-term debt was $833 million. The debt is being used to further
expand the company as they are looking to add 15 more Boeing
737-800's to their fleet by 2016. Copa can be fully trusted with
the debt to purchase new planes due to their high return on capital
of 22 percent. The debt-to-equity ratio of 0.52 is low compared to
most other airlines, and Copa has enough operating earnings to
cover their interest payments 17.5 times. On the equity side,
shares outstanding have been stable. There has been no change in
share count for the past year and half and shares outstanding have
only increased at an annual rate of 0.41 percent over the past five
years. A stable share count alleviates the worry of share dilution.
It is hard to go wrong with a Profitability & Growth rating of
10/10, even with room for error. Revenue has been growing at an
annual rate of 20.8 percent over the past five years and earnings
have been growing at an annual rate of 14.4 percent. Earnings have
jumped 35.5 percent in the past 12 months. It superior business
plan has allowed Copa to maintain some of the highest margins in
the industry. Its operating margin is at 19.84 percent; nearly
quadruple the Global Airline industry median of 5 percent. The
large margins have help maintain the high return on equity
currently at 22.48 percent.
Copa's board of directors is made up of 11 members with three of
them being independent. Six of the directors have been with the
company throughout its rapid growth phase, including the Chairman
and CEO. Pedro Heilbron has been the CEO of Copa Airlines since
1988. He has an M.B.A. from George Washington University and a B.A.
from Holy Cross. The Chairman, Stanley Motta, has been a director
of Copa since 1986. He is a director on six other boards and is a
graduate of Tulane University. The current management has done an
excellent job growing the company and will likely continue to do so
in the future.
What stands out with Copa is its consistent earnings power. The
company has a 4-star rating for Business Predictability has been
consistently increasing its earnings over the years. Earnings have
grown annually 21 percent over the past 10 years, 14.4 percent over
the past 5 years, and 35.5 percent over the past 12 months.
To be conservative I used the 5-year EPS growth rate of 14.4
percent with the GuruFocus DCF Calculator to receive a fair value
of $189.41 with a 24 percent margin of safety. The price is
Venezuela has been a large issue for all airlines flying there. The
government has a mandates that Venezuelan flights originating in
the country be paid in Bolivars. The government has been
withholding the funds and not paying them back to the airlines.
Airlines have been experiencing a year delay in repatriating the
funds from Venezuela. Throughout the repatriating process, the
government has been devaluing the currency for the transactions in
order to pay back a smaller amount of U.S. dollars. Copa is still
owed $509 million and have reduced their flights to the country by
40 percent. So far the flight reduction has had small impact on
operating margins with less than a one percentage point impact.
Most all other airlines have either drastically reduced or
cancelled flights to Venezuela.
Direct flight competition and jet fuel prices can be a risk to Copa
in the future. The airline has a very efficient spoke and hub model
for the Latin American market with Panama being the hub. Consumers
will likely want more direct flights, but at this time it is not
economically feasible to maintain the routes. Copa is still
experiencing high margins with their efficient model. Their main
competitors, Avianca Holdings (
), and LATAM Airlines Group (
) have not been able to successfully maintain operations as
efficiently as Copa. Avianca had an operating margin of 8.35
percent in 2013 and LATAM had an operating margin of 4.53 percent.
Copa's operating margin was a superior 19.84 percent.
Jet fuel prices have a large potential to be an issue in the future
since it makes up 37.5 percent of the operating expenses. The
company hedges about 20-30 percent of their fuel costs. According
to the International Air Transport Association, jet fuel prices
have only increased 3.9 percent for the past year as of June 13,
2014. Copa's CEO, Pedro Heilbron, has said that the airline has
been able to increase revenues enough to compensate for the
increase in fuel prices.
Another risk is that the Class A voting shares for Copa Holdings
are 100 percent held by CIASA, a company controlled by several Copa
officers and their families. The shares that are for sale on the
open market are non-voting shares. Other than the Class A
shareholders, no one has any say in what will happen to the
The earnings growth for Copa is expected to continue even with the
complications from Venezuela. It has been able to successfully
manage its fuel costs and has fleet of efficient jets at an average
age of only 5.7 years. Any concerns about a slowdown can be
monitored on the company's website. The monthly traffic statistics
are released every month, and May's year-over-year passenger
traffic was up 12.6 percent. Copa's hub, Tocumen International
Airport, will be completing a large expansion project within the
next couple of years allowing it to capitalize on the increasing
flight traffic within Latin America. Boeing has forecasted that
Latin American flight traffic will have the second highest growth
rate behind Middle East to Asia Pacific traffic through 2032.
The investing guru with the largest holding is Jeremy Grantham,
co-founder and chief investment strategist for GMO LLC. He
currently controls 1,281,061 shares of CPA, about 2.9 percent of
the shares outstanding. You can follow him at GuruFocus to see how
he manages his position.
About GuruFocus: GuruFocus.com tracks the stocks picks and
portfolio holdings of the world's best investors. This value
investing site offers stock screeners and valuation tools. And
publishes daily articles tracking the latest moves of the world's
best investors. GuruFocus also provides promising stock ideas in 3
monthly newsletters sent to
This article first appeared on