After a long period of falling passenger demand that saw revenue and profit margins fall sharply, Copa Holdings (NYSE:CPA), the operator of Latin American airline Copa Airlines, looks like it's finally on the verge of getting back to full strength. The company's recent first-quarter earnings report showed all of its most important metrics moving in the right direction again. And management also updated its capacity and margin guidance, reflecting its confidence that these positive trends will continue for the remainder of the year.
Revenue is heading up, up and away
The economic recovery that began late last year in many of Copa's largest markets appeared to gain additional momentum in the first quarter. Owing to more stable currencies and increased demand, Copa's passenger traffic increased 9.9% compared to last year. And yields -- the average fare paid per mile, per passenger -- rose for a second consecutive quarter, increasing 0.9%. Despite the nearly double-digit increase in traffic, Copa managed to increase its capacity (available seat miles) by just 4.3%, leading to an impressive load factor (the percentage of seats that were filled) of 81.5%. As a result, Copa's unit revenue or RASM (revenue per available seat mile) improved 6% compared to last year.
Total revenue for the quarter increased 10.6% to $616.7 million, and while the company technically missed top-line analyst estimates by $4.3 million or so, the trends for unit revenue and passenger yields are very encouraging, as long as they're sustainable. The company says it believes second-quarter RASM will be up by a mid-single-digits percentage, and is guiding for full-year RASM to increase by around 3%, which would be the first full-year RASM increase since 2013.
While there wasn't a whole lot of additional detail provided, management stated that they've seen demand continue to strengthen into the second quarter, and expect this trend to continue throughout 2017. Better yet, the demand increases they're seeing are not isolated to any specific region, but are essentially systemwide. However, on the earnings call, Copa noted that the largest improvements from a unit revenue perspective came from Brazil, Colombia, and to a lesser extent, Argentina, while mentioning Venezuela as a laggard.
Margins are improving rapidly, too
Prior to 2015, Copa regularly posted operating margins north of 19%. During the depths of the recent economic malaise, however, Copa's operating margins took quite a hit, hovering around 12% for each of the last two years.
In the first quarter, Copa did a great job holding the line on costs. The company's cost per available seat mile (CASM) excluding fuel was 6.2 cents, up just 1.6% compared to last year. With the company increasing its unit revenue at a far greater rate than its unit costs, it was able to post a very healthy 19.1% quarterly operating margin, up 2.2 percentage points from last year -- essentially back in line with what the company was achieving back in its prime. Those substantial margins helped increase adjusted earnings per share by 48% to $2.43, beating analyst estimates of $2.33.
This recovery looks far from over
Given the tumultuous environment of the past couple of years, Copa says it will be "careful and cautious" about deploying additional capacity. But based on the results to date, as well as current trends in demand, Copa is now planning on 2017 capacity growth of 7%, up from its previous guidance of 6%. In addition, while the company affirmed its full-year operating margin guidance of 15% to 17%, it now expects to come in at the high end of this range, and over the longer term, is targeting margins back in the 18% to 20% range.
With the worst seemingly behind it, Copa's net income -- along with its dividend -- appears primed for big gains moving forward. Analysts, on average, are now predicting earnings per share of $8.30 in 2017 and $9.45 in 2018. Under the company's current dividend policy, those figures would roughly result in quarterly dividend payments of $0.83 in 2018 and $0.95 in 2019, compared to the $0.51 quarterly dividends being paid out this year.
In addition, even after a fairly large run-up in the share price over the last 12 months, Copa's stock is currently trading at a forward P/E ratio of only 15.5 or so. While Copa's short-term fortunes remain tied largely to the strength of the economies where it operates, shares continue to look attractive to me.