Copa Holdings: Outlook Brightens Amid Undervaluation

Copa Holdings' outlook has brightened since the author initiated coverage as a "Strong Buy". The stock has returned 26%, including dividends, outpacing the market. Despite this, the author believes the stock is still undervalued, although less severely so.

Copa Holdings (CPA) has seen a significant boost in its stock performance, returning 26% including dividends since the author initiated coverage as a "Strong Buy" earlier this year. Despite this impressive gain, the author remains confident that the stock is undervalued, albeit less severely so than before.

The author's thesis on Copa Holdings is built on several key factors. First, the company's strategic location between North and South America allows it to serve as a convenient one-stop connection point for city pairs as far apart as San Francisco and Montevideo. Second, Copa's focus on cost control has positioned it as the region's most efficient operator, with the lowest variable cost (CASM) ex-fuel. This efficiency is driven by a single type of aircraft, investments in owned simulators, maintenance, and pilot training.

Additionally, Copa's prudent financial policies and high cash and liquid investments provide a substantial hedge against regional volatility. The company's operating income, averaging over 20%, further underscores its financial discipline and product quality. The opportunity to continue reinvesting in efficiency and growing its fleet, supported by increasing Latin American demand for travel, adds to Copa's long-term prospects.

Recent performance data supports the expected growth trajectory. For instance, Q1 statistics indicate a CASM of 5.8 cents, which is a competitive advantage that is hard to replicate. Additionally, share repurchases and dividend yields remain generous, even during a capex peak.

The macroeconomic environment also bodes well for Copa. Latin America's GDP growth is expected to be around 2.5%, which will improve disposable income and travel demand. Furthermore, the reopening of Venezuela's airports and the gradual elimination of capital controls in Argentina are positive developments that will benefit Copa's network.

However, despite the positive outlook, the author notes that the stock is still undervalued, with the P/E ratio currently below 7. The author believes that purchases at around $110 offer a reasonable margin of safety. This cautious stance is likely due to the recent rally in the stock price, which has reduced the margin of safety.

In conclusion, Copa Holdings' outlook has brightened, but the stock remains undervalued. The company's strategic location, cost control measures, and prudent financial policies make it a compelling investment opportunity. However, investors should remain cautious and monitor the stock price to ensure they are getting a reasonable margin of safety.

References:
[1] https://finance.yahoo.com/quote/CPA/news/
[2] https://seekingalpha.com/article/4799767-copa-holdings-stock-outlook-brightens-yet-discount-remains