Copa: Hottest Prospect South of Havana?

Copa Holdings (CPA) flies under the radar of most U.S. investors. Its subsidary companies, Copa Airlines, based in Panama, and Aero Republica, operating out of Columbia, are among the leaders in Latin American air transportation. Together they fly approximately 327 daily flights to 66 destinations in 29 countires. The company's profits boomed from 2004 through 2014, advancing from $1.60 to $8.37 per share. The shares, which fetched under $21 in 2005, touched an all-time altitude of $162.80 early in 2014. Well publicized problems in Venezuela resulted in capital controls. Copa has about $452 million ($US) in corporate funds stuck in limbo due to that situation. While Copa expects to reclaim at least some of that amount there is no assurance it will ever be recovered in full. The company is financially sound even if a 100% write-off is needed. Here is what management said about the situation. Copa Holdings closed the quarter with US$1.15 billion in cash, short-term and long-term investments, representing 46% of the last twelve months´ revenues. Of such cash, US$452.2 million is subject to exchange controls in Venezuela and pending repatriation. Cash, short-term and long-term investments excluding the funds pending repatriation from Venezuela represent approximately 28% of the last twelve months' revenues. Profits have suffered amid uncertainty about the final outcome. That led CPA shares to hit a new multi-year low of $42.63 this past Monday. EPS estimates for 2015 and 2016 now center on $5.69 and $6.06, respectively. Those numbers assume nothing good happens concerning Venezuela. Copa has started to bounce back. As of Thursday at 10:44 a.m NYSE-listed CPA was quoted at $47.04. CPA may decide to simply pull the plug on operations there in the same way discount retailer Target (TGT) did with its failed Canadian expansion. That could be prove to be a major catalyst for a stock price rebound. To exit Canada, Target took an approximately $8 billion one-time charge. Since that happened its shareholders have celebrated. Copa pays a good dividend. The latest quarterly rate was $0.84 per share, providing a 7.14% current yield before foreign tax withholding. Its yield is the highest ever due to the now very low share price. The price-to-earnings (P/E) multiple is now just 8.3x the already reduced projection for 2015, which represents a 24.5% discount to Copa's 10-year median multiple. The four instances when CPA was a truly great buy each reflected similar valuations (green-starred below). When optimism reigned, Copa topped out with P/Es of 16x to more than 19x. A simple regression to 11x next year's EPS estimate would support a one-year target price of almost $67, about 42% above the current price. That's hardly an upper limit. CPA touched $100 or greater during each of the calendar years 2012 - 2015. Option players might consider selling puts or buying calls. The longest expiration now available is February 2016. Next week we should see the May 2016 series added. The relatively conservative $45 strike price puts drew $4.20 on Thursday taking the breakeven point for put writers to $40.80. That's lower than any CPA shares have changed hands for since 2010. Option buyers could lock in $40 calls at $9.29 per share. They'd only need a move to $50 or above before Feb. 18, 2016, to start making money. Either a favorable resolution to the Venezuelan problem, or a termination of service to that country might send CPA much higher. At 71% below the old peak, risk appears limited while upside potential is large. Buy the shares, sell the puts or own some calls on this less-than-blue-chip Latin American powerhouse. There is a place in portfolios for special situations like this one.

Copa: Hottest Prospect South of Havana?

Four instances when the Latin American airline was a great buy reflected similar valuations.

Columnist Conversation

An Interesting Chart

This Weekend on Real Money

Stocks Under $10 Portfolio

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.