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Copa Holdings Stock Downgraded -- but Does It Deserve It?

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Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Shares of Copa Holdings (NYSE: CPA) got sent on a rollercoaster ride yesterday , first falling steeply, then climbing to close for a gain, after the Panamanian airline reported a big drop in third-quarter earnings. This morning, it looks like Copa shareholders are in for more of a straight shot down. With two analysts downgrading Copa Holdings, the stock is in free fall, and approaching a 9% loss as we move toward the midday mark.

Here's what you need to know.

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Image source: Getty Images.

What Copa Holdings said

Copa Holdings yesterday reported a 45% decline in Q3 profits to just $1.36 per share, despite revenue growing 2% to $672.4 million. Both numbers disappointed analysts, who had been looking for $1.42 per share in profits on sales of $684.2 million. And yet, the quarterly loss arguably wasn't Copa's fault at all.

Explaining how its profits managed to fall despite its revenue rising, Copa noted that jet fuel costs have been on the rise, and in Q3 2018, it had to pay about 32% more per gallon of fuel than it spent in Q3 2017. Also blamed for the earnings miss were the declining values of airfares paid by Brazilian and Argentine flyers. Over the past year, the Brazilian real has lost 14% of its value relative to the U.S. dollar. The Argentine peso, meanwhile, has plunged more than 50% .

Translated into U.S. dollars, that South American revenue didn't add up to a whole lot of North American profit.

Analysts weigh in

Regardless of whose fault it was that Copa didn't earn much last quarter, Wall Street analysts are punishing the stock with downgrades today. This morning, investment megabanker Citigroup pulled its buy rating from Copa and downgraded the shares to neutral. Worse, L.A.-based investment banker Imperial Capital cut its rating from in-line to underperform and assigned Copa Holdings a lower price target of $68, as reported today by StreetInsider.com (subscription required).

Imperial explains: "Our incrementally negative view on CPA shares is driven by its margin outlook through FY19 and longer term."

The analyst sees "macroeconomic headwinds in Brazil and Argentina" persisting, with foreign exchange rates continuing to devalue revenue generated in these countries, and economic turmoil decreasing demand, as well.

Curiously, though, at the same time as Imperial notes a weakening in traffic growth down south, the analyst also criticizes Copa for "reducing FY19 capacity growth to 3%" (which seems strange, as there would be less need to buy additional planes if demand in two large markets will be weak). What's perhaps most interesting about Imperial's downgrade, however, is its concern that " oil prices " may continue to be a factor hurting Copa's earnings -- because the way I see it, the opposite may be more likely.

Oil's latest moves

Consider: Copa's Q3 earnings report covered the quarter ending Sept. 30, 2018. However, no sooner had September ended than oil prices began to fall -- and fall steeply. Over the past six weeks, WTI crude oil prices have fallen roughly 25%, to a recent per-barrel price below $57. In Canada, CBC News just reported that oil sands-derived crude oil has hit an all-time low of just $13.46 per barrel.

Granted, not all oil costs so little. Brent crude still sells for more than $67 a barrel -- but even that is a steep 22% drop from what it cost just six weeks ago, and CNBC is quoting analysts commenting that even a production cut at OPEC won't be enough "to drive prices back up to anything like $80 Brent," predicting, "we're going to be in a $60 to $70 Brent market for some time."

All of which, I have to say, bodes pretty well for a company like Copa, which has been suffering from Brent's run-up past $80 a barrel.

The upshot on these downgrades

Does all this mean that Citigroup and Imperial are wrong to downgrade Copa Holdings? Not necessarily. Predictions can be wrong, and predictions about oil prices in particular. But even so, with $345 million in trailing GAAP profit and a market cap of just $3.6 billion, Copa Holdings stock is selling for only 10.4 times earnings today.

The company also pays a big 4.1% dividend yield that its earnings can easily cover (at a payout ratio of only 35%). Between that dividend yield, and the 5% annualized earnings growth that analysts are still forecasting for Copa over the next five years, I have to say that 10 times earnings really doesn't seem like a lot to pay for the stock. And if oil prices stay low, and allow Copa Holdings to grow its profits even faster?

Copa Holdings stock could be downright cheap.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Copa Holdings. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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