As a wise man named Mel Brooks once said, "It's good to be da king." Although he had something else in mind, one of the reasons I'd like to be da king is to collect tolls.
That's a prime reason why I've recently taken a shine to the airport biz. I love the travel business, but making money in the space is a tough slog for nearly all companies involved. Online travel heavies like Expedia (NASDAQ:EXPE) have to fight it out with a never-ending parade of competitors. Boeing (NYSE:BA) butts heads with a foreign powerhouse called Airbus, and don't get me started on the air carriers. I can't stand airline stocks, not even ostensible money-makers like Southwest Airlines (NYSE:LUV) and JetBlue (NASDAQ:JBLU). I just don't like that fuel-price exposure, nor the constant fare wars.
The one chunk of the travel business that's got a moat is the destination. Travelers don't have a lot of options for getting from the air to the ground, and when they do, they pay the airport, not to mention buy their duty-free hooch, air-sickness meds, and Michael Crichton books. Properly run airports -- many of which are publicly traded -- get a nice cut of all that commerce, which is why I want a cut of their cut.
The news today makes me acutely aware that I am not alone. This morning, the wires carried the story that British airport operator BAA turned down a friendly $16.5 billion bid from the Goldman Sachs (NYSE:GS) consortium. That came weeks after BAA, which runs Heathrow, Gatwick, and other important hubs, spurned the Spanish GrupoFerrovial for its lesser offer.
Then, quick as you can say "Gimme some of that," we're hearing that GE (NYSE:GE) may be making a bid, though that firm has so far issued no comment on the report. BAA's market cap is currently just under $16 billion. Judging by management comments on the Goldman Sachs bid -- saying it didn't reflect "the true value" of the company -- there may be some life yet for BAA shares, which, alas, don't trade on our shores in a sponsored ADR.
Still, investors should watch this situation closely, since valuing airports is a tricky business. They're all different in growth potential, regulatory oversight, pricing restrictions, and exposure to weather-related service outages, but when they're running well, and pull in sufficient traffic revenues to cover their fixed costs, they can make a lot of free cash flow. I think the posturing for BAA is just the most visible example of a burgeoning trend, one that's already been running for a while -- often fronted by foreign firms like Australia's Macquarie Airports, which bought Copenhagen Airports late last year.
This is precisely why I recommended a temporarily beleaguered foreign airport operator for our Motley Fool International Stock Report, Around the World in 80 Minutes. At that time, it was valued much more cheaply than its peers, including BAA, on just about any metric you could examine. That situation holds today, even though the operator I recommended has already risen 15% from the recommended price.
In short, I think investors would do well to take a hard look at other publicly traded airports out there before the shares climb any higher. On our increasingly interconnected globe, I think these 21st-century toll bridges represent the best values in the travel space.
If you'd like a peek at my airport thesis, click here.
Seth Jayson has no financial position in any firm mentioned here. View his Fool profile here. JetBlue is a Motley Fool Stock Advisor pick. The Fool has a disclosure policy.
