America Airlines – Copa Holdings: Stock Takes Off, Alternative Window Closes (NYSE:CPA)

On November 18, Copa Holdings (CPA) launched its third-quarter earnings report. The headlines had been properly wanting encouraging, because the airline delivered a miss on revenues and earnings, the widest of the previous few quarters. However when operations grind to a halt and the highest line drops 95% YOY, speaking about latest working efficiency may be pointless.

As a substitute, buyers have to be way more targeted on the 2021 turnaround story. In spite of everything, shares of Copa have climbed a whopping 70% up to now three weeks alone to face solely 27% off all-time highs. The query then turns into: may CPA nonetheless be worth shopping for at present ranges, or have buyers missed their likelihood to experience the updraft on this worldwide journey theme?

(Picture Credit score: Firm web site)

Tough 12 months for worldwide journey

Earlier than speaking operations and outlook, a really temporary primer may be so as. Copa Holdings may be very a lot a pure-play airline that’s primarily uncovered to worldwide journey inside Latin America. The route map beneath clearly exhibits the corporate’s value proposition: to leverage the strategic geographic place of its most important hub in Panama Metropolis to attach Latin America, the US and Canada, mainly bridging the 2 halves of the continent.

Copa serves its 80 locations in 30-plus international locations with a fleet of Boeing ((BA)) 737 plane. The simplified operations helps to elucidate how the airline has managed to maintain prices down. In 2019, CASM-ex (a measure of opex per accessible seat, excluding sure objects) of 6.6 cents resembled the associated fee construction of an ultra-low price service like Spirit Airlines (SAVE), despite the fact that Copa’s passenger income per accessible seat far exceeded what ULCCs within the US can normally produce working home routes.

(Supply: Routesonline)

The issue is that, in 2020, worldwide journey has been damage essentially the most by the COVID-19 disaster. Copa was significantly impacted, following Panama’s nationwide quarantine order in March that shut down all airports within the nation for a number of months. In consequence, within the third quarter of the present 12 months, Copa’s income passengers carried dropped 99%, with a complete of solely 559 departures being dwarfed by 3Q19’s greater than 33,000.

Nonetheless, operations are slowly returning to some kind of regular. As of mid-November, Copa had restarted service to roughly half of its whole locations. Across the similar time, the 737 MAX was recertified, and the plane ought to be flying once more quickly. In December, the administration crew expects that the airline will function 40% of its 2019 capability, which is sort of a standing bounce from just about no operations within the first half of 3Q20.

Nonetheless time to purchase?

There’s fairly a bit to admire about Copa Holdings. Ignoring for a second the (hopefully short-lived) challenges of COVID-19, I recognize the corporate’s area of interest place in Latin American worldwide journey.

Extra importantly, Copa has proven that it will possibly preserve prices low whereas producing per unit revenues that almost all would take into account first rate for a low-cost service. Lastly, the airline appears well-capitalized to climate the final leg of the pandemic, with over $1 billion in cash, equivalents and investments within the third quarter amounting to over one-fourth of whole property and comparatively little debt.

Information by YCharts

The issue, in my opinion, is the price and valuation. The chart above exhibits that CPA traded for many of 2020 very very like lower-quality American Airlines ((AAL)) – which occurs to be the main US service that generates essentially the most passenger revenues from Latin America routes. However in a short time, CPA spiked and now seems to be much more like Southwest Airlines (LUV), a stock that I take into account to be of a lot lower-risk and higher-quality than common.

Right now, CPA is valued at over 10x trailing (i.e., pre-pandemic) earnings. Whereas the a number of will not be too excessive in comparison with what it has been up to now, it’s removed from a discount for the airline sector generally – even throughout occasions of macroeconomic stability. Because of this, I feel CPA may have climbed too far and too quick for potential buyers to leap on board now, successfully closing a window of alternative that existed previous to November.

Beating the market by a mile

I don’t personal CPA as a result of I imagine I can create superior risk-adjusted returns in the long term utilizing a distinct technique. To dig deeper into how I’ve constructed a risk-diversified portfolio designed and back-tested to generate market-like returns with decrease danger, be a part of my Storm-Resistant Development group. Make the most of the 14-day free trial, learn all of the content material written to this point and get fast entry to the group.

Disclosure: I’m/we’re lengthy LUV. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (aside from from Looking for Alpha). I’ve no enterprise relationship with any firm whose stock is talked about on this article.