Copa Holdings, S.A. Earnings: Latin America's Slump Continues to Be a Drag

By Markets Fool.com

Image source: Getty Images.

Continue Reading Below

The weakness in Latin America's economy continues to be a drag on Copa Holdings, S.A. (NYSE: CPA) in 2016. But the company's low cost structure has shown its advantage, buffering investors from too big a loss in net income. Here's a look at what you should know about second-quarter earnings, released Wednesday after the market closed.

Copa Holdings results: The raw numbers

Metric

Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Sales

$472.9 million

$517.5 million

(8.6%)

Net income

$60.3 million

$71.2 million

(15.3%)

Earnings per share (EPS)

$1.29

$1.46

(11.1%)

Data source: Copa Holdings earnings release. YOY = year over year.

What happened with Copa Holdings this quarter?

Continue Reading Below

Revenue declined in large part because of lower ticket prices, and net income was hurt as a result. But withairlines,the headline numbers rarely tell the true story. So, a few key metrics are worth exploring to show what's really going on in the business.

  • Adjusted net income, which pulls out gains from unrealized fuel hedge positions and currency hedges, fell 47.6% to $21.5 million, or $0.50 per share. This more accurately portrays how quickly falling revenue has hit the bottom line.
  • Revenue passengers carried rose 8.1% to 2.0 million, and revenue passenger miles rose 6.2% to 4.2 billion.
  • Pricing was the real problem for Copa Holdings in Q2. Yield fell 14% to 11.3 cents per seat mile, and operating revenue fell 7.7% to 9.3 cents.
  • Operating cost per seat mile fell just 5.5% to 9.1 cents, driven by a 21.3% reduction in fuel prices to $1.81. This is why adjusted net income fell as much as it did.
  • As a result of prices falling faster than operating costs, operating margin fell 2.2% to 6.9% and breakeven load factor increased 4.7% to 66.6%.

What management had to say

The weak economy in countries like Brazil, Venezuela, and Colombia is certainly hurting pricing for airline tickets, but demand to fly is still fairly strong, and Copa Holdings' low cost structure still allowed for a profit during the quarter. This low cost structure is the company's competitive advantage, and will allow it to adjust flights to markets where there's more profitable demand.

To that end, management recently opened service to two new destinations -- Chiclayo, Peru, and Holguin, Cuba -- in an effort to diversify.

Looking forward

Managing costs in the face of economic weakness will be key throughout 2016, and Copa Holdings has done a good job on that front, helped by lower fuel costs. Investors should watch for signs that the economies in Latin America may be starting to turn a corner, which is really what the company needs to return to growth.

One positive to fall back on is the continuation of the $0.51 quarterly dividend. For now, Copa Holdings is still generating enough income to cover the dividend without weighing down the balance sheet, giving investors a nice 3.2% dividend yield until the macro environment improves.

A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early in-the-know investors! To be one of them, just click here.

Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Copa Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.