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Copa Continues To Excel, But The Macro Environment Has Some Challenges

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Copa Airlines Boeing 737-800 airplane Medellin Rionegro airdrome successful Colombia

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In position of controlling what is wrong their power, I proceed to judge that Copa Holdings (NYSE:CPA) guidance is among nan champion successful nan business. Relative to nan past 4th earlier nan pandemic, capacity is up, yields are up strongly, and costs are down significantly. At nan aforesaid time, aerial recreation is not yet backmost to normal successful Latin America, but continues to improve.

Copa shares are up a spot since my past update, which is disappointing comparative to nan underlying performance, but really not bad astatine each compared to nan performances of different Latin American carriers for illustration Volaris (VLRS) (down 45%), Gol Linhas (GOL) (down 66%), and Azul (AZUL) (down 72%), arsenic good arsenic different carriers I respect for illustration Alaska Air (ALK) (down 16%).

I do spot elevated economical consequence complete nan adjacent twelvemonth aliases so, arsenic good arsenic a consequence of much fierce behaviour from location competitors. Even so, if mid-single-digit semipermanent gross maturation and low-to-mid-teens free rate travel margins are valid semipermanent targets, these shares stay meaningfully undervalued.

Strong Numbers To Close The Year

Copa banal posted bully financial results for nan 4th fourth of 2022, arsenic good arsenic patient guidance for 2023. I’d besides statement that nan 2023 guidance had a small much item than has been nan inclination recently, suggesting to maine that guidance apt feels a small much assured that 2023 will spot nan business proceed to inclination backmost toward normal.

Revenue roseate 55% from nan anterior twelvemonth and 10% from nan anterior 4th successful nan 4th quarter, beating by 1% and besides representing 31% maturation comparative to nan 4th fourth of 2019. While a 1% gross hit isn’t that exciting, it’s worthy remembering that Copa’s monthly postulation reports springiness analysts capable accusation to dial successful nan quarterly top-line reports.

Passenger gross roseate 58% yoy successful nan quarter, pinch postulation (revenue rider miles) up 32% and rider gross per disposable spot mile up 24% to $0.131. Overall output improved 19% yoy and 7.5% qoq to $0.15, and that is 20% supra nan Q4’19 level, connected a 6% summation successful disposable spot miles. Load facet remains reasonably steady, improving almost 3 points from nan year-ago level (86.6% vs. 83.5%), but down 20bp from nan anterior quarter.

Copa continues to do an fantabulous occupation of managing controllable costs. Overall costs per disposable spot mile (or CASM) was up 27% yoy and down 2% qoq to $0.103, while CASM ex-fuel roseate 18% yoy and 3% to $0.061, down 24% from Q4’19. EBITDAR roseate 31% (with separator down astir six points to 32.6%) and operating income roseate 42% (with separator down 340bp to 24.7%), beating by 7% and 12%, respectively.

Further Growth In 2023

Management guided to 12% to 14% capacity maturation for 2023, a spot beneath Street expectations of astir 15%, but gross per disposable spot mile was guided astatine $0.121, somewhat supra nan Street and astir 12% supra 2019’s level, arsenic request remains rather healthy. Management besides guided to unchangeable CASM ex-fuel, pinch an EBIT separator of 17% to 19% versus Street expectations of 16.9%.

Copa guidance has typically been comparatively blimpish pinch guidance successful nan past, truthful I would respect this arsenic an “opening bid” connected a beardown 2023, albeit 1 pinch a fewer challenges.

First, LatAm aerial recreation still hasn’t afloat recovered. Family recreation rebounded comparatively quickly, helping airlines for illustration Volaris initially, but gains person travel a small slower of late. As of nan astir caller IATA data, wide LatAm aerial postulation is astir 11% beneath pre-pandemic levels, while world recreation (far, acold much applicable to Copa) is down astir 18%. Go backmost to June of 2022 and those numbers were down 13% and 27%, respectively, which is why I make nan constituent that Copa has benefited from ongoing world postulation betterment while home request has flattened a bit.

I do deliberation 2023 could spot immoderate challenges to demand. Economies are slowing astir nan world, and astir three-quarters of Copa’s caller request is leisure, which is typically much economically-sensitive. At nan aforesaid time, immoderate of Copa’s rivals are getting a small much aggressive, truthful I do spot a humble consequence of much fierce value title successful 2023, which would push Copa to either little fares successful consequence aliases judge weaker load factors (and it typically makes much consciousness to little fares).

On nan costs side, I don’t person galore concerns astir Copa’s expertise to deed its near-term targets. Jet substance prices are ever a adaptable to consider, but a weaker world macro backdrop typically isn’t bullish for oil/fuel prices. I do wonderment if, complete nan agelong term, Copa whitethorn request to beryllium a small little fierce connected costs. The institution has done a bully occupation of pulling aggregate levers to trim net costs, but astatine immoderate constituent you consequence alienating valuable labor if you push excessively hard.

The Outlook

At its core, I still really for illustration nan Copa story. Management has shown complete and complete again that it tin execute connected costs, arsenic good arsenic turn its fleet responsibly (including caller additions of new, much efficient, 737-MAX 9’s). It besides operates an charismatic hub-and-spoke strategy from Panama City, wherever location are difficult-to-replicate geographic and upwind advantages and wherever nan capacity for title is comparatively limited.

It is surely imaginable that business recreation will ne'er afloat normalize post-pandemic; galore businesses person seen that they tin usage teleconferencing to switch in-person visits for astatine slightest immoderate functions, and they whitethorn good beryllium loath to afloat return to pre-pandemic levels of recreation spending. That said, galore businesses person commented that nan income acquisition isn’t nan aforesaid without face-to-face interaction, and I still judge economical maturation crossed Mexico, Brazil, and different LatAm economies will thrust recreation request (leisure and business) successful nan years to come.

Copa has exceeded my anterior expectations for normalizing gross backmost to pre-pandemic levels (and beyond), but I haven’t changed my halfway anticipation that nan hose will spot semipermanent halfway gross maturation successful nan mid-single-digits. I’m not expecting important stock gains for Copa (so my gross maturation assumptions are adjacent to my underlying postulation maturation assumptions), but I do deliberation nan institution has nan action to compete much successful definite home routes if it chooses to do so.

On nan separator side, I expect 30% EBITDAR margins successful 2025 and I still judge Copa could execute and prolong low-to-mid-teens FCF margins connected a sustained basis. I do judge year-to-year volatility successful free rate travel is conscionable thing investors person to expect and unrecorded with, arsenic fleet description /delivery schedules will create immoderate meaningful year-to-year moves successful capex. I besides note, though, that guidance has gotten backmost to returning superior to shareholders and will apt grow these returns successful nan coming years.

Discounted free rate travel suggests a adjacent worth adjacent to $130, and that’s pinch a double-digit discount complaint to bespeak nan added risks of operating successful nan hose manufacture and crossed aggregate Latin American markets. I get an ever higher adjacent worth connected nan ground of a 7x guardant EBITDAR aggregate – a 10% discount to nan company’s trailing mean (largely to bespeak maturation of nan business) and a important premium to nan existent manufacture aggregate (around 5.5x).

The Bottom Line

Copa is really trading beautiful adjacent to that manufacture mean now, and I deliberation that’s conscionable excessively debased for a institution pinch above-average maturation imaginable (from underlying request growth) and a proven expertise to power costs. I tin admit that this whitethorn not beryllium nan champion clip to ain an hose (with declining user confidence), but fixed nan semipermanent potential, I deliberation it’s still a worthwhile information astatine today’s price.

This article was written by

Stephen Simpson floor plan picture

Stephen Simpson is simply a freelance financial writer and investor. Spent adjacent to 15 years connected nan Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That past portion isn't wholly true. Probably.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

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