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Initiating Coverage on Latin American Carrier Copa Holdings

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On May 29, we initiated coverage on Copa Holdings, S.A. (CPA - Free Report) . The company is benefiting from the robust demand for air travel, courtesy of the improving Latin American economy. However, headwinds like high fuel costs and multiple flight cancellations due to the recent Venezuelan crisis have ensured a Zacks Rank #3 (Hold) for this airline company. Copa Holdings, through its main subsidiaries — Copa Airlines and Copa Colombia —   offers airline passenger and cargo services.

The Bullish Case

We are impressed with the company’s efforts to reward shareholders. In February 2018, Copa Holdings increased its quarterly dividend payment by 16% to 87 cents per share ($3.48 annualized). Also, it took initiatives to modernize its fleet, which is commendable. It exited the first quarter of 2018 with 81 Boeing 737s and 19 Embraer-190s in its fleet. Moving ahead, Copa Holdings aims to increase its fleet size. The carrier’s efforts to expand its operations are encouraging as well.

Furthermore, Copa Holdings is being aided by impressive demand for air travel backed by an improving Latin American economy. For example, in the first quarter of 2018, total revenues improved 15.9% year over year, mainly owing to the 16.3% improvement in passenger revenues. The company's performance with respect to unit revenues is also noteworthy.

Moreover, Copa Holdings’ financial flexibility and strong balance sheet are real assets amid economic instability. Leverage is low with a debt-to-capitalization ratio of 28.7% as of Mar 31, 2018. In addition, the carrier, which is based in Panama City, Panama, has an impressive record with respect to punctuality.

The Bearish Case

Copa Holdings’ bottom-line growth is being restricted by high fuel costs. In the first quarter, average fuel price per gallon rose 17.6% year over year to $2.16 per gallon. We note that oil prices have increased more than 11% so far this year.

For the second quarter, fuel prices at Copa Holdings are projected to be even higher ($2.25 per gallon), which might weigh on earnings growth. This apart, expenses pertaining to labor are expected to put pressure on the bottom line in the same period.

Additionally, the company expects a negative impact to the tune of $15 million in the second quarter due to the political row involving Panama and Venezuela. In fact, Copa Holdings had to cancel approximately 360 flights pertaining to its Venezuela operations in the first quarter of 2018 due to the dispute.

However, the strife has been resolved with the Venezuelan and Panamanian governments announcing their decision to re-establish diplomatic and commercial relations on Apr 26, effective immediately. However, re-occurrence of such disputes might hurt the stock severely.

Copa Holdings’ April traffic was also disappointing. Load factor (percentage of seats filled by passengers) declined 10 basis points to 81.9% on a year-over-year basis due to capacity expansion outweighing traffic growth. For 2018, capacity is expected to grow by approximately 9% year over year. This has given rise to fears that capacity-related woes, which had hurt the entire airline space in the recent past, might resurface.

Due to the above headwinds, shares of Copa Holdings have shed 17% of their value so far this year, underperforming its industry’s decline of 13%.

Stocks That Warrant a Look

While we expect Copa Holdings to perform in line with its peers and industry levels over the next one to three months and advice investors to wait for a better entry point before accumulating shares, one can look at SkyWest, Inc. (SKYW - Free Report) , Expeditors International of Washington, Inc. (EXPD - Free Report) and GATX Corporation (GATX - Free Report) as good investment options for investors interested in the transportation space.

While Expeditors sports a Zacks Rank #1 (Strong Buy), SkyWest and GATX carry a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank stocks here. 

Shares of Expeditors, SkyWest and GATX have rallied more than 16%, 8% and 18%, respectively on a year-to-date basis.

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