Because developed market airline stocks have traditionally underperformed other sectors, investors frequently overlook emerging market counterparts — such as Panamanian based carrier COPA.
Given the profitability of some firms in the sector, such dogmatic avoidance could be a mistake for investors seeking lucrative returns. One of the best emerging market airline stocks is COPA (CPA, quote).
COPA originally ferried passengers to and from Panama City. Over the past few years however, it has evolved into an airline connecting passengers all over North, Central, and South America.
Like Panama has for decades, COPA takes advantage of its fortuitous geographical position by exploiting the emerging trend of increased travel between North and South America. A decade ago, the vast majority of North-South American traffic flowed from South American capitals and major economic centers to only a couple of American cities — namely, Miami and New York. Now as South Americans, and in particular Brazilians, become increasingly wealthy, second-tier cities in both North and South America are seeing a substantial rise in traffic abroad.
COPA is able to make the most of this trend because of its fleet of fuel-efficient narrow-body aircraft. Every major city in North and South America is within eight hours of Panama City, allowing COPA to fly to destinations that other airlines can’t because of logistical difficulties. By offering one-stop, convenient service to cities as diverse as Porto Alegre, Orlando, Havana, Cordoba, and Las Vegas, COPA has found a very profitable niche.
Because of the way that hub synergies function, COPA will easily be able to increase its number of destinations to even more second-tier cities, even if origin and destination (O&D) demand to Panama City itself is negligible.
In addition to its advantageous geography, the company benefits from a cheaper labor structure than developed market airlines.
As with all airlines, oil is always a factor in COPA’s stock performance. While this important facet of the company’s finances should not be overlooked, the company engages in savvy fuel hedges, and with oil potentially dropping further on the back of global economic woes, the stock could be even cheaper than it already looks.
And make no mistake about it, COPA is cheap here. With a current P/E of 10.7 and a forward P/E of 7.9, it is priced like a developed market airline even though it benefits from emerging market levels of growth. You could consider starting a position in COPA to take advantage of the firm’s solid fundamentals.