Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope.
Investors in Mexican stocks have endured a topsy-turvy year, with stocks falling after President Trump was elected -- then beginning a long climb back after he was inaugurated, his tough talk on Mexico and NAFTA notwithstanding. The news isn't getting any less confusing today, either, with investment banker Scotiabank announcing apparently contradictory ratings on three of Mexico's privatized airport holding companies today.
Here are three things you need to know.
1. Dawn breaks over the Pacific
Let's start with the good news. This morning, Scotiabank announced that it is upgrading shares of Grupo Aeroportuario del Pacífico, S.A.B. de C.V. (NYSE:PAC) and assigning the stock a new price target of $110 per share. This airport group operates 12 Mexican airports, many on the Pacific coast (Guadalajara, Puerto Vallarta, Tijuana, San Jose del Cabo, Silao (Guanajuato), Hermosillo, Mexicali, Los Mochis, La Paz, Manzanillo, Morelia, and Aguascalientes), as well as Sangster International Airport in Montego Bay, Jamaica.
As noted on TheFly.com today, Grupo Aeroportuario del Pacífico, known colloquially (and mercifully) as simply "GAP," won an outperform rating from Scotiabank -- presumably in response to a strong "traffic report" on August flights. Earlier today, GAP reported that total terminal passengers increased 9.9% in the company's 13 airports in August (versus August 2016 traffic). Available seats on flights into and out of GAP's airports grew 8.5%, indicating growing popularity of flights to and from Mexico. Additionally, load factors on planes landing and taking off from GAP airports increased 110 basis points to 82.6%.
2. Clouds circle the center
That's the good news. The bad news is that, while Scotiabank was upgrading GAP stock, it issued a new downgrade (to "sector underperform") on rival Mexican airport operator Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (NASDAQ:OMAB).
Grupo Aeroportuario del Centro Norte, known as "OMA," also operates 13 airports -- but as the name suggests, mainly in Mexico's north central region. These include the airports in Monterrey, Acapulco, Mazatlan, Zihuatanejo, Chihuahua, Culiacan, Durango, San Luis Potosí, Tampico, Torreon, Zacatecas, Ciudad Juarez, and Reynosa.
OMA's most recent traffic report (from July) showed significantly weaker growth than what PAC reported today, with total traffic up only 2.9% year over year. Moreover, half the company's airports saw either no growth or a shrinkage in traffic. As a result, Scotiabank is recommending investors sell OMA stock, and has cut its target price to $43 per share -- about 9% below the stock's current price.
3. The southeast looks overcast as well
The other bad news today concerns Mexico's third big airport operator, Grupo Aeroportuario del Sureste, S. A. B. de C. V. (NYSE:ASR), which operates nine airports in the southeast -- Cancun, Merida, Villahermosa, Veracruz, Oaxaca, Huatulco, Cozumel, Minatitlan, and Tapachula.
Scotiabank decided to downgrade this one as well. Albeit not as drastic as its cut on OMA, the banker downgraded Grupo Aeroportuario del Sureste ("ASUR") to "sector perform," which is essentially a neutral rating. Scotiabank also cut its price target to $185 per share, though, which implies a similar-to-OMA 9% potential loss for shareholders.
That's actually pretty curious, because while ASUR's traffic growth wasn't quite as strong as PAC's this morning, it did handily beat out OMA's performance from last month. In a traffic report released two days ago, ASUR noted that passenger traffic grew 10% at the company's Mexican airports in August and 5.2% in San Juan, Puerto Rico. Combined, total traffic at the company's airports was up a very respectable 8.9%. Regardless, Scotiabank is downgrading the shares.
How should investors react?
Scotiabank's decision to recommend selling OMA stock (despite the fact that it's growing) and reduce its rating on ASUR stock (even though it's growing nearly as fast as PAC), while upgrading PAC stock, doesn't seem to make a lot of sense. Dividend investors, in particular, may feel especially perplexed.
You see, one of the main reasons investors may want to consider investing in Mexican airport stocks is because of the dividends they pay. According to data from S&P Global Market Intelligence, PAC, now rated a buy by Scotiabank, pays a very generous 4.7% dividend yield -- more than twice the average yield of S&P 500 stocks. OMA, on the other hand, while less generous, still easily outclasses the average yield on the S&P with its own 3.8% dividend. ASUR, however, pays the weakest dividend of the group -- just 1.7%, which is actually below the average on the S&P.
So what explains Scotiabank's moves today? The combination of a rich dividend and strong traffic growth certainly help to explain why Scotiabank may be optimistic about PAC stock. OMA pays a great dividend, too -- but OMA is seeing weaker-than-average traffic growth, which may diminish the attractiveness of owning the stock for its dividend. As for ASUR, it may present the contrary case -- a weak dividend, but strong traffic growth that could create the potential for better dividends to come.
As for me, I look at all three stocks and see price-to-earnings ratios of 20 and up, versus analyst projections of long-term earnings growth of no better than 5% for any of the stocks. Dividends or no dividends, strong traffic growth or weak -- at today's prices, I don't see any compelling need to own any of these three Mexican airport stocks.