Copa Holdings, S.A.

They say the quickest way to become a millionaire is to start as a billionaire and buy an airline. That may be true in the saturated markets of the developed world, but because of a surging middle class, opportunities abound in the emerging markets.

Copa Holdings, S. A. ( CPA - Snapshot Report ) is one airline that is benefiting from the growth in Latin America. The company is growing earnings as it is able to more than offset rising fuel costs with higher revenues.

The company has also been returning value to shareholders through higher dividend payments. It recently upped its payout ratio and currently yields 2.6%.

Copa Holdings provides services to 52 destinations in 25 countries in North, Central and South America and the Caribbean. It is headquartered in Panama City, Panama.

First Quarter Results

Copa reported adjusted Q1 EPS of $1.86 per share, crushing the Zacks Consensus Estimate of $1.37. It was a 31% increase over the same quarter in 2010.

Total revenue jumped 25% year-over-year to $423.1 million. This was also well ahead of the Zacks Consensus Estimate, which called for revenue of $394.0 million. Revenue growth was driven by a 21% increase in passenger traffic and a 3.9% increase in yield per passenger mile to 16.7 cents.

Meanwhile, operating cost per average seat mile declined 0.9% to 10.3 cents, despite a 24% increase in the average price per gallon of jet fuel.

Overall operating income rose 29% to $101.0 million, as the operating margin expanded from 23.0% to 23.9% in the quarter.

Outlook

Management revised its guidance higher for 2011 following solid Q1 results. The company stated that "as a result of strong demand, which has resulted in higher fares and fuel surcharges, unit revenues (RASM) are now expected to come in at 13.2 cents, more than 7% above previous guidance."

The company expects the average cost per gallon of jet fuel to rise from $2.60 to $3.19 per gallon, but it still projects a very strong operating margin in the range of 18.0% to 20.0%.

This bullish guidance led analysts to revise their estimates significantly higher. The 2011 Zacks Consensus Estimate rose from $5.07 to $5.47 and currently represents 10% growth over 2010 EPS.

The 2012 consensus estimate increased from $6.03 to $6.39, which corresponds to 17% growth over 2011 EPS.

It is a Zacks #1 Rank (Strong Buy) stock.

Dividend

On May 4, Copa announced a change in its dividend policy. The company will now payout up to 30% of its annual net income through dividends. The previous rate was up to 20%.

On May 18, the company announced an annual dividend of $1.64 per share, up from $1.09 in 2010. This corresponds to a yield of 2.6%.

Valuation

The valuation picture for Copa, like many Latin American stocks right now, looks attractive. Shares trade at just 11.4x forward earnings, a discount to the industry average of 11.9x. Its PEG ratio is a very reasonable 1.1 based on a 5-year growth rate of 10%.

Copa has exceptionally strong margins for an airline and generates strong returns on equity. Its ROE over the last 12 months is 24.0%, better than the industry average of 19.0%.

Copa has a market cap of $2.7 billion. It has a strategic alliance with Continental Airlines, Inc.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com.