Copa Holdings Firmly Back On A Recovery Flightpath

 

Notwithstanding a first quarter "hiccup" that saw flights canceled in January and February due to the Omicron variant, business continues to recover at Copa Holdings (CPA), with capacity and passenger revenue slowly coming back and management continuing to execute exceptionally well on controllable costs.

Copa shares are up about 23% since my last article, outperforming both Volaris (VLRS) and Gol Linhas (GOL), both of which saw better performance earlier in the recovery cycle from stronger recoveries in domestic traffic within Mexico and Brazil, respectively. At this point, I continue to see double-digit annualized return potential, and I don't think investors need to be overly concerned that they've missed all the recovery gains.

 

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Copa Holdings Firmly Back On A Recovery Flightpath

Copa Holdings Continues To Execute Well, But COVID-19 Lingers On As A Threat

 

Management at Copa Holdings (CPA) have burnished their reputation for operational excellence during the sharp pandemic-driven declines in air travel demand, as the company has tightened up spending and preserved liquidity to a greater extent than expected, and the June quarter showed unexpected operational upside as traffic begins to recover.

COVID-19 lingers on as a threat, though, and I believe that’s one of the major factors that has kept pressure on the shares in recent months – unlike Mexico’s Volaris (VLRS), which has been able to leverage recovering intra-country travel in Mexico (particularly tourist and family trips), Copa’s international routes remain heavily impacted by travel restrictions and reduced business activity.

I haven’t meaningfully changed my numbers since my last article, though Copa will come out of this downturn in better shape on cash/liquidity than I’d expected. I’m still anticipating a return to pre-pandemic revenue levels in mid-2024, with a 30% or better EBITDAR margin in 2023. With those inputs, I believe Copa remains substantially undervalued, with upside to $100/share or more once restrictions begin to lift.

 

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Copa Holdings Continues To Execute Well, But COVID-19 Lingers On As A Threat

Copa Still Has More Upside To Offer Even On A Slower Recovery Path

Nothing has really gone easy for the airline industry in this pandemic, including a recent resurgence in COVID-19 cases that has led many governments to reinstitute strict (or at least stricter) travel restrictions. That's not going to make life any easier for Copa Holdings (CPA), as it tries to balance capacity, costs, and cash burn across its Latin American footprint, but it doesn't also change my long-term view all that much.

Copa shares have appreciated almost 80% since my last update, but I still think there's more left in these shares as travel demand recovers, Copa simplifies its fleet, and continues to leverage long-term growth through its very valuable Panama-centered hub-and-spoke system. With long-term adjusted revenue growth (adjusted to a pre-pandemic starting point) of 4% and low-double-digit FCF margins (actually a contraction from the trailing decade), I still see double-digit annualized total return potential today.

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Copa Still Has More Upside To Offer Even On A Slower Recovery Path

Copa Looks Like One Of The Emerging Market Airline Survivors

This is unprecedented territory for airlines. While recessions, war, and natural disasters have led to airlines grounding some or all of their fleets for relatively brief periods of time, nothing like Covid-19 has been seen in living memory on a global scale. Copa Holdings (NYSE:CPA) has grounded its entire fleet, and it's hard to say what demand will look like for the remainder of 2020, but Copa has the wherewithal to survive this and emerge on the other side still capable of generating attractive, long-term results.

Obviously, there is tremendous uncertainty when it comes to modeling Copa now. Following management's guidance for capacity additions in 2020 is a good starting point, but nobody really knows what the virus will do, what global infection rates will be like, what governments will do in response, and how quickly people will be willing and able to resume air travel. Although I believe humans are very resilient and global travel will get back to normal in a few years, there's a great deal of uncertainty in the interim, and Copa has to survive that before the long-term health of the global air travel market is even a relevant driver.

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Copa Looks Like One Of The Emerging Market Airline Survivors

Copa Holdings Drifting Despite Strong Performance

There's little to fault in the operating performance of Copa Holdings (CPA) since my last update, but the shares haven't moved much since then. There's always a margin of error in assessing why a stock has performed the way it has; in the case of Copa, I believe there are still some concerns about slowing economic growth in multiple Latin American markets, and perhaps some rotation away toward riskier Brazilian carriers like Azul (AZUL) and Gol (GOL) on an improving outlook/sentiment for domestic Brazilian air travel.

Whatever the reason(s), I remain bullish on Copa. Management has an excellent, almost irreplaceable network that can be serviced with a simple narrowbody fleet, and Copa management has shown an admirable knack for boosting revenue and controlling/minimizing costs. Macroeconomic risk goes with the story, but I believe the addition of the 737 MAX next year will be a positive for the company, and I still think the shares are undervalued.

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Copa Holdings Drifting Despite Strong Performance

Turbulence Still Hitting Copa Holdings Hard

One of the last things I said about Copa Holdings (CPA) in my last article on the company was that "adverse forex and higher fuel costs could get worse before they get better", and those twin headwinds are primarily responsible for another 5% decline in the share price since the time of that article. What's more, management's recent investor day offered up a lot of evidence to support a "soft" guidance reduction for the second half of the year - in other words, investors shouldn't be surprised to see some weakness in the third quarter results and some downward margin guidance for the fourth quarter.

It's tough to recommend a stock while expectations are still moving down, particularly when sector valuations are generally predicated on the next 12 months' financial performance. I don't think Copa is the greatest idea out there for investors who need a quick gain and/or who can't or won't accept near-term losses for longer-term gains. On a longer-term basis, though, I continue to believe the valuation is pretty interesting and even those investors not willing to accept the risks and uncertainties today should keep a closer on this one for signs of stabilization over the next three to six months.

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Turbulence Still Hitting Copa Holdings Hard

Copa Buffeted By Macro Issues

Operationally, Copa Holdings (NYSE:CPA) continues to do well with those things it can control. The company’s planes are pretty full, non-fuel costs are well-controlled, and its hub-and-spoke system is well-placed to continue benefiting from traffic growth across Central and South America. Unfortunately, there are other parts of the operational picture that Copa cannot control, and those didn’t go so well for the company in the second quarter, leading the shares down to a new 52-week low.

There are always going to be macro worries with a company and stock like Copa. The company needs healthy economies in major operating areas like North America, the Caribbean, and South America, relatively stable currencies, and manageable fuel costs, not to mention reasonable and responsible competitors. While the market is clearly sour on Copa right now, and there are ongoing economic and currency risks in countries like Brazil and Argentina, I think the long-term value opportunity is pretty compelling if you can tolerate the near-term risk, volatility, and unpopularity.

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Copa Buffeted By Macro Issues

Copa Dinged By Some Macro And Competitive Worries, But Still Operationally In Good Shape

Although a well-run company, Copa Holdings (CPA) is the sort of stock that's more likely than not to give investors multiple second chances. Between exposure to a host of Latin American economies, oil prices, and the often irrationally competitive airline industry, even a well-run airline like Copa is going to have its challenges. And so, it seems to be now, as the shares have slid about 15% from the time of my last article and underperformed over the past year or so due to worries about increasing low-cost competition, increasing oil prices, and issues related to Venezuela.

Copa is never going to be a "safe stock", but the combination of growing demand, growing capacity and pricing, and good cost control seem like one that should work well. With that, I think this is a name to consider for investors who can stomach the elevated risk and volatility.

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Copa Dinged By Some Macro And Competitive Worries, But Still Operationally In Good Shape

Copa Holdings Flying High Again On Market Recoveries And Internal Improvements

Economic troubles in key commodity-driven markets like Brazil, Colombia, and Venezuela certainly hurt Copa Holdings (NYSE:CPA) in the recent past, as the shares dropped around 75% from their peak in early 2014 to their low in the fall of 2015 and accompanied a 20% drop in revenue driven by weaker yields. Since those 2015 lows, though, investors have come back to these shares in a big way - the shares are within 15% of their prior peak (and up more than 50% so far this year) as yields have started to recover and the company has been expanding capacity.

There are a lot of positives that I see with Copa. The challenges in 2014-2016 forced the company's management to take a more critical look at their operations, and I believe efforts to control costs, improve revenue yield, and re-emphasize profitable expansion will pay off down the road. What's more, the company remains well-placed in a critical hub location (Panama's Tocumen airport) and continues to focus on low-traffic routes that don't lend themselves to profitable direct competition. Add in numerous future expansion opportunities and the recovery potential of Brazil and Colombia, and I believe Copa can look forward to strong growth for a number of years.

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Copa Holdings Flying High Again On Market Recoveries And Internal Improvements

Seeking Alpha: Copa's Stock Recovery Has Outpaced The Business Recovery

It's pretty much a given that the Street will take stocks far too low in bad times and far too high in good times, so I can't say I'm surprised Copa Holdings' (NYSE:CPA) shares are up more than a third since my write-up in late December, when I thought the shares looked undervalued but still vulnerable to ongoing weakness in major South American economies.

It looks as though 2016 will be the bottom for Copa, but it is hard to feel a lot of confidence that the economies of Brazil, Colombia, and Venezuela are going to stage a strong, fast turnaround. That said, the company has been increasing its exposure to healthier economies like the U.S., while doing a good job of responsibly managing capacity and expenses. I still believe Copa can generate over $4 billion in annual revenue in 2024 and good cash flow, but my fair value hasn't moved nearly as much as the share price, so I don't see the same opportunity that I did in December.

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Copa's Stock Recovery Has Outpaced The Business Recovery

Seeking Alpha: Copa Holdings Looks Undervalued, But Its Markets Likely Haven't Bottomed

Copa Holdings (NYSE:CPA) and Alaska Air (NYSE:ALK) make for an interesting study in contrasts. Both are well-run airlines by most of the metrics that matter, but they operate in very different markets. While Alaska Air continues to benefit from a benign-to-healthy U.S. airline industry environment, Copa is getting crushed by economic turbulence in major markets like Brazil, Venezuela, and Colombia. Since the time of my last article on Copa, the shares have fallen more than 40% while Alaska Air's shares have climbed nearly 25%. That Copa has outperformed GOL (NYSE:GOL) and Avianca (NYSE:AVH) is true, but doesn't put any money back into shareholders' pockets.

I do believe that the current share price discounts the long-term value of Copa, but it's hard to make money in the midst of weak reported results and lower expectations. Likewise, it's worth at least asking why investors should expect any meaningful turnaround in Brazil, Venezuela, or Colombia in the near term, as these are all commodity-driven markets that need a combination of higher oil, base metal, and agricultural prices to lead a turnaround.

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Copa Holdings Looks Undervalued, But Its Markets Likely Haven't Bottomed

Seeking Alpha: Copa Holdings Battered And Bruised By Brazil's Malaise

Maybe the nicest thing I can say about Copa Holdings (NYSE:CPA) is that in the roughly nine months since I last wrote about the stock, its Latin American peers including Gol Airlines (NYSE:GOL), LATAM Airlines (NYSE:LFL), and Avianca (NYSE:AVH) all managed to do worse in terms of stock price performance. Then again, the fact that one stock was down about 33%, another down about 44%, and the last about 63% doesn't really lessen the sting of seeing Copa decline about 30% in value.

Copa has been thumped as investors have fled Latin American airlines on growing yield concerns in Brazil, Colombia, and Chile as commodity-driven exports show no particular signs of strength and averse currency moves weaken the local economies. I still believe that Copa is a good property, but the quality of a house is somewhat moot when investors won't go near the neighborhood. Like many other Latin American stories, I see value in Copa today but you have to have a high risk threshold to own it and there is most definitely a risk that conditions will get worse before they get any better.

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Copa Holdings Battered And Bruised By Brazil's Malaise

Seeking Alpha: Copa Holdings Seeing Turbulence, But Still A Top-Notch Airline

Through the third week of July, my March call to not worry too much about the problems Copa Holdings (NYSE:CPA) was facing in Venezuela seemed like a good one - the shares were up 25% as the company continued to enjoy 20%-plus earnings growth on strong capacity growth and firm pricing. Unfortunately, Copa's second quarter report sourced investors on the shares as management increased its capacity reduction plans for Venezuela and lowered margin guidance as a result, leading to flat net performance relative to my last article.

I'm not sure why the guidance reduction was such a surprise. Avianca (NYSE:AVH) and Gol Linhas (NYSE:GOL) had been reducing exposure to Venezuela and Copa management indicated in May that they'd follow suit, and it was (or should have been) well-known that Venezuela was an uncommonly profitable market for Copa. Copa's update for July trends was not positive, though, and it is going to take some time to work past the Venezuela impact and reassure the Street that this is still a very profitable airline.

I believe Copa is still a good airline, a good growth story, and a good name to own for international diversification. GOL is probably an easier name to own right now (and undervalued in its own right), but I still see solid opportunity at Copa. Even I take a pretty conservative cut to my earlier numbers, I come up with a fair value of close to $140 and $150-plus is not that hard to support.

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Copa Holdings Seeing Turbulence, But Still A Top-Notch Airline

Seeking Alpha: Ugliness In Venezuela Creating An Opportunity With Copa Holdings

There are exceptions to every rule, including the generally sound advice to steer well clear of airline stocks. Alaska Air Group (ALK) has done well for investors by focusing on the disciplined operation of regional routes, and Copa Holdings (CPA) has followed a broadly similar strategy in across North, Central, and South America.

Investors expect certain risks with airline stocks, namely volatile fuel prices and revenue uncertainty stemming from often irrational competition and the macroeconomic client. The ongoing mismanagement of Venezuela has created another significant risk for Copa, as devaluation imperils the company's significant cash holdings in the country and an escalating spat with the government of Panama could threaten even more.

No airline is a safe investment, but Copa looks well positioned to take advantage of growing traffic across Latin America for many years to come. The market appears to be all but writing off Copa's Venezuela operations, and the shares look too cheap today.

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Ugliness In Venezuela Creating An Opportunity With Copa Holdings

Investopedia: A Great Model And Growing Markets Powering Copa Holdings

This year has turned into a challenging one for emerging market investors, as China remains weak (at least relatively so), Brazil and Mexico seem to be turning in the wrong direction, and multiple Southeast Asian markets sell off on macroeconomic worries. Even so, business continues on at Copa Holdings (NYSE:CPA), where a strong and savvy business plan has led this Latin American airline to not only strong margins and good growth, but solid prospects for the coming years.

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