Good sector, tough place to invest
I firmly believe that travel is a growth industry, but my concern has been finding companies that can capitalize on that growth. I generally won't touch an airline, since even the cream of that crop, JetBlue (NASDAQ:JBLU) and Southwest Airlines (NYSE:LUV), are subject to multiple market forces that I'd rather not have to ponder. And while I love Expedia (NASDAQ:EXPE) as a customer, the war between it, Priceline.com (NASDAQ:PCLN), and others makes me seriously doubt that there's a reliable payoff in the travel-booking space for investors.

Is there anyone who operates in the travel space but has a reasonable moat? Those who have followed my few blurbs on GrupoAeroportuario del Sureste (NYSE:ASR) will know that I'm intrigued by the toll-bridge opportunity offered by these Mexican airport operators. Now, we've got another travel-related toll bridge to consider.

A new toll bridge
Last week, another one of the privatized Mexican airport groups had its IPO, GrupoAeroportuario del Pacifico (NYSE:PAC). This group operates completely independently from ASR, in an entirely different area of Mexico.

PAC holds the concessions to operate airports in Guadalajara, Puerto Vallarta, Tijuana, San Jos del Cabo, Silao (Bajo), Hermosillo, Mexicali, Los Mochis, La Paz, Manzanillo, Morelia, and Aguascalientes.

While I'm only in the beginning stages of my research into this company, I like what I've seen so far.

A few numbers

2002

2003

2004

2005*

CAGR

Revenue

$164.50

$170.87

$196.50

$226.84

8.4%

EBIT

$53.26

$60.45

$75.42

$96.41

16.0%

EBITDA

$100.48

$106.63

$125.18

$151.70

10.8%

Cash Ops

$61.55

$50.86

$104.67

$122.53

18.8%

Capex

$45.40

$27.10

$27.46

$35.84

-5.7%

FCF

$16.15

$23.76

$77.22

$86.68

52.2%

*2005 figures TTM as of 9/31/2005. Others full-year as of 12/31.
 Dollar figures in millions, from Capital IQ. Pesos converted to dollars at historical rates.

While top-line growth has been slow and steady, cash earnings have ramped up much more quickly. In airport systems like these, this discrepancy is usually a function of a high proportion of fixed costs, which, once met, put an ever-increasing portion of top-line growth into earnings.

I have yet to try to reconcile cash flow growth with U.S. GAAP earnings (which are all over the map for the period), but because of differences in Mexican GAAP and vagaries in the tax code, I've learned never to get too caught up with earnings. Cash flow tends to be much closer when we compare the two sets of accounting principles, and PAC's cash flow looks good.

The true masters
One of the realities of investing in these airport groups is that you're at the whim of a couple of different masters. The first is the Mexican government, which owns the concessions and can, for a variety of reasons, rescind the deal. The government must also put its stamp of approval on capital spending plans, and it caps the per-passenger revenues, which are the primary source of income.

The other entity pulling the strings is the partner AMP. This entity controls 15% of share capital but, by virtue of special rights, controls the company. It is entitled to a technical assistance fee that's the greater of a flat fee or 5% of EBITDA. While this might look pretty scary on the surface, it actually provides an incentive for AMP to produce for outside shareholders. AMP itself is owned by four separate entities, the most important three of which are:

  • AENA, a subsidiary of the Spanish state-owned airport company.
  • ControladoraMexicana, a joint venture owned by some prominent Mexican investors, some of whom sit on boards at companies like Royal Carribean Cruises (NYSE:RCL) and Telefonos de Mexico (NASDAQ:TFONY).
  • DCA, a subsidiary of Actividadesde Construcciones y ServiciosS.A., a large European construction company that is one of the largest operators of concessions in Latin America and the world.

Foolish bottom line
While this ownership structure might seem scary, as any value investor will tell you, even scary is a buy at the right price. And I'm beginning to think PAC might have a very good price, both compared to international peers and on a discounted cash flow basis.

By my calculations of enterprise value (for a comps set I did last month), PAC is trading at about two times trailing-12-month revenues. For comparison, Mexican peer ASR traded at about four times revenues, Copenhagen Airports recently sold for about seven times revenues, and British operator BAA traded at about 5.5 times revenues. Comparing enterprise value to earnings before interest, taxes, depreciation, and amortization, PAC is still the low end of the spread. It trades at an EV/EBITDA ratio of three, while the top end of our group sports a ratio of 12.

When I try to come up with a model for a discounted cash flow valuation (and believe me, it's very rudimentary at this point), I still show PAC trading at about 70% of my estimate of its intrinsic value. That valuation model, by the way, uses a 12% required rate of return, plus cash-flow growth assumptions that are a good deal smaller than those that PAC has actually accomplished.

Is this really a 70-cent dollar? I'm not familiar enough with the details to know whether my numbers are right, and keep in mind, airports that lose their traffic (say, to storm damage or economic slowdowns) can get to the wrong side of the fixed-cost line very quickly. But the possibility that this toll bridge is selling at so big a discount is more than enough to convince me to read the rest of the company's recent 400-page IPO filing. I suggest that Fools who like out-of-the-way bargains do the same.

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Seth Jayson never thought he'd be spending his weekends reading 400 pages worth of Mexican airport filings. At the time of publication, he had shares of ASUR but no positions in any other company mentioned. View his stock holdings and Fool profile here. Fool rules are here.