Copa Holdings Is Looking For A Comeback, Its Dividend Agrees

Key Points

• Copa Airlines reported its first quarter 2023 results on Wednesday after the markets closed. Investors may be in for pleasant surprises as industry-specific KPIs showcase expansion and improvements in the business. 
• With cost factors outside management control rising, mainly due to volatile jet fuel prices, the company has reduced expenses in areas on which it can directly impact. 
• Management guidance points to 2023 sporting double-digit growth rates and near-record operating margins. Performing some assumptions will allow investors to understand these analyst targets and even place one of their own. 
• A double-digit upside may be in the works for CPA stock. While markets await its performance, it offers an attractive, newly reinstated dividend payout.

Copa Holdings NYSE: CPA, also called Copa Airlines, reported its financial results for the first quarter of 2023 on Wednesday after market hours. Copa is a member of the Star Alliance. This global airline network comprises names such as United Airlines NYSE: UAL. Shares of the airline are cautiously trading up by a point after the market close as investors and markets digest what is discussed in the company's press release.

Investors could see a breakout through the stock's intense resistance levels of $95-$96 per share, where markets may require significant bullish indicators to justify rallying. Management reported airline-specific solid key performance indicators (KPIs) and other metrics that could please the Wall Street gods. Improving financials, especially in the airline's free cash flow generative power, points to management's ability to reinstate dividend payouts and implement share repurchases. 

Recovering Business

Copa Airlines reported its monthly traffic statistics for April 2023, which saw a year-over-year increase of 15%. Overall, a double-digit rise in volumes accrued to a revenue increase of 29% in the first quarter compared to a year prior. Management is pleased to announce that, despite financial and industry challenges faced during the COVID-19 pandemic, Copa managed to add two Boeing 737 MAX 9 aircraft. Ending the quarter with 99 aircraft would represent an adjustment to accrue 2.8% in added capacity, a needed investment now that passenger traffic has grown by 7.1%.

While management is executing a cost-reduction strategy, some margins were adversely affected by factors outside the internal business model. Operating cost per available seat mile (CASM) increased 17.2% to $0.102 in the first quarter, an increase attributed to the elevated jet fuel prices per gallon. A 61.4% rally in jet fuel per gallon was enough to deliver a 2.3% blow to operating margins in Copa. However, excluding the effects of an advancing jet fuel price, CASM for the airline only rose by 2.1% to $0.062. As oil prices retrace from their 2022 high prices of $120 per barrel, Copa decreased its fuel costs as a percentage of revenue to 30.6% from 35.5%, respectively.

In aspects that management can better control, cost-reduction initiatives include trimming some of the overhead fat. As layoffs and optimization strategies occurred, wages, salaries, benefits, and other employee-related expenses declined by 9.7%. In the air, passenger servicing expenses totaled $20.4 million to deliver a 20.3% reduction, as training and more efficient systems simplified onboard product offerings. 

Investor Expectations

Within the report, management points to key features that should allow for a swift reaction to the stock's price action. Guiding 2023 outlooks to a 12-13% capacity growth can be a proxy for the accelerating trend that Copa has been experiencing lately. Copa Holdings' financials will show that capacity utilization, another proxy for demand gauging, increased from 32.2% in 2021 to 60.4% in the first quarter of 2023. Operating margins today, affected by wild swings in oil prices throughout 2022, stand at 22.3% to mark a near 10% expansion from 2022 margins. Management continues to expect 2023 operating margins between 22% and 24%; markets can thus expect similar EPS growth and free cash flow levels considering these outlooks.

Keeping all else the same, a 22-24% operating margin could translate into a comprehensive 14-16% net income margin for Copa. Assuming this 12-13% capacity growth, linked to historical utilization levels, revenues for 2023 could fall between $3.5 billion and $3.9 billion. Further, assuming a 14% net margin would deliver a net income of $490 million on the low end, and again conservatively assuming no further share repurchases, Copa shareholders would see an implied EPS figure of $12.40. These assumptions only translate to a 28% earnings per share growth after investors saw nearly 40% growth during the past twelve months.

Copa Holdings analyst ratings suggest the stock should be trading around $112.13 per share. Considering the previous implied $12.40 earnings per share and sustaining today's price-to-earnings multiple of 9.0x, analysts may consider these same scenarios to play out. These calculations would yield an implied price per share of $112 in line with analyst expectations; investors who believe a global economic slowdown may lower oil prices can expect more optimistic assumptions. 

With a newly reinstated Copa Holdings dividend yield, which pays an attractive 3.72%, investors can add CPA stock to their watchlists as a gateway to generate extra income and gain exposure to the double-digit upside.