The Mexican airport industry has received an almost perfect storm of bad news. The recent news of drug related violence in the region, the global decline in economic activity, swine flu, and an earthquake on April 27th in Mexico City have slammed shares of Mexican stocks. Fear has hit Mexican airline stocks particularly hard.
Shares of Grupo Aeroportuario del Pacifico ADR (PAC) fell over 17% in price on April 27th after news that the WHO elevated the flu pandemic risk level. This likely short duration health risk event has created an opportunity for value investors to take advantage of the fear by being greedy and buying up some of these shares on the cheap. I added shares of PAC on April 28th to the Fat Pitch Financials Portfolio for a net average price of $20.28 per share. I announced the trade on Twitter since I was press for time on Tuesday. This position is now approximately 5.5% of the Fat Pitch Port by value.
While there is the potential that short term risks associated with swine flu might increase, it is unlikely that this will impair the important transportation infrastructure assets of Grupo Aeroportuario del Pacifico, S.A.B. de C.V., also referred to as GAP. GAP is particularly attractive since it is less exposed to the tourism industry than the other airports that operate in the eastern coastal vacation areas of Mexico and its shares provide a better relative value.
Grupo Aeroportuario del Pacifico operates twelve airports throughout Mexico’s Pacific region, including the major cities of Guadalajara and Tijuana, the four tourist destinations of Puerto Vallarta, Los Cabos, La Paz and Manzanillo, and six other mid-sized cities: Hermosillo, Guanajuato, Morelia, Aguascalientes, Mexicali and Los Mochis. The Mexican government commissioned GAP to manage these airports through 2048, and the company currently faces no competition in its geographic area. The shares are listed on the Mexican Stock Exchange under the ticker symbol GAP and it also has an ADR on the New York Stock Exchange under the ticker symbol PAC, which are the equivalent of 10 GAP shares. Shares started trading in February 2006.
As of the recent first quarter financials for the period ending March 31, 2009, earnings per ADR share for the past trailing twelve months are $1.96 per share. Given yesterday’s closing price of $20.95 the P/E is 10.7. The enterprise value to EBITDA ratio is a very reasonable 7. The trailing dividend yield is an attractive and safe 8.8% and the forward dividend yield is likely to be over 10%. The potential of earning a 10% yield while waiting for this perfect storm to blow over is very attractive.
Net income for the first quarter decline 6.6% from the prior year, but that is less than the -25.8% change that occurred in fourth quarter of 2008. While it is likely the second quarter will be as brutal as the fourth decline of last year or worse, it is very likely this cash cow will keep producing. GAP had a 64% EBITDA margin in FY08 and an operating margin of 41.5%. Those fat margins provide a nice buffer to the challenges ahead.
The real value opportunity here lies in the balance sheet. The price to book ratio is 0.59. There is $2.81 in cash per share of PAC. The company has a very low debt to equity ratio. As things settle down in Mexico and the global economy recovers, we see no reason why GAP would not eventual trade at least at a price to book ratio of at least 1 or more. Therefore, my target price is $35, which is where PAC traded at last June.
Here are some other key financial statistics for Grupo Aeroportuario del Pacifico adjusted to ADR shares and the U.S. dollar (using 10 shares per ADR and 0.0726 dollars per Mexican peso):
Stock price: $20.95
Shares outstanding: 56.1 million*
Market Cap: $1,175 million
Cash & short term investments: $158 million
Debt: $113 million
Enterprise value: $1,130 million
Dividend (trailing): $1.85 per share
Total debt/EBITDA ttm: 10.4
EPS ttm: $2.20
FCF ttm: $87.1 million
Sales ttm: $249 million
Book value: $1,971 million
*There are actually 561 million shares but I divided that by 10 to adjust everything in terms of the ADR.
Disclosure: I own shares of Grupo Aeroportuario del Pacifico (PAC).