Copa Holdings' Margin Surges on Higher Passenger Demand

Copa Holdings (NYSE: CPA) -- operator of Latin American airline Copa Airlines -- recently reported third-quarter earnings that included strong year-over-year revenue growth and margin expansion. What was even more impressive was the fact that Copa put up those numbers in the face of hurricanes and an electrical failure at its primary hub in Panama City that significantly impacted the results. These events caused the airline to cancel more than 450 flights -- roughly 1.5% of its total for the quarter -- and cost the company an estimated $12 million in operating earnings. In spite of all that, the metrics that matter continue to look impressive for Copa.

Passenger demand keeps rising

The Latin American economic picture is looking more positive each quarter, with Copa still seeing increasing demand. Just as important, CEO Pedro Heilbron says the company is seeing "rational behavior" from its competitors in terms of fares and capacity growth. Based on these factors, the company expects appetite for air travel in the region to remain healthy into next year.

Similar to the past few quarters, Copa says it's not seeing strong demand from one or even a handful of its markets, but improvement basically across the board -- though the company noted that Brazil continues to perform even better than expected. This steady increase in demand has helped fuel increases in the company's load factor (the percentage of seats filled with paying passengers), which was up 1.5 percentage points to 85.7%, an all-time record.

A successful quarter by any metric

Copa's revenue picture has improved dramatically over the past few quarters, and Q3 provided more of the same.

Yields (the average fare paid per passenger, per mile) increased 1.3%, while unit revenue (also called RASM, or revenue per available seat mile) rose 2.4%. And total revenue was up 15.6% to $657.1 million. Given the quarter's extraordinary events, investors can be pleased that every revenue metric continues to move in the right direction. The icing on the cake? Given Copa's expectations for healthy travel demand, the company raised its full-year load factor and RASM guidance.

Operating margin is soaring, too

With expanding unit revenue and declining unit costs, Copa has been able to boost its margins back toward their impressive historical levels. During the quarter, CASM (cost per available seat mile) was down 3.2%, while CASM excluding fuel was down 1.2%. Put it all together and -- in its best quarter since 2013 -- Copa's operating margin rose to 18.1%, up from 13.4% last year. That margin improvement also helped fuel impressive growth in adjusted EPS -- to $2.38, up from $1.30 last year.

The company is in the midst of reducing its annual expenses by $50 million, which should pave the way for continued margin expansion. The company narrowed its guidance to the high end of its previous range, now aiming for a full-year operating margin of 17% to 18%. And Copa's initial guidance for 2018 operating margin is a range of 17% to 19%, with a longer-term goal of 20% and higher.

What happened at the Panama City airport?

Besides multiple storms and hurricanes to contend with, the company's Panama City hub suffered a power outage in September that interrupted the airline's operations for several hours, resulting in 140 canceled flights in a single day.

Heilbron believes this will only be a one-time event:

Not bad for a challenging quarter

Though results would have looked even better if not for so many flight cancellations, Copa Holdings is finally getting back to something approximating its steady-state potential. And with Latin America having recently returned to economic growth, the company looks set to benefit for years to come from increased air travel throughout the region.

Copa is forecasting that healthy demand will continue into next year, and should recognize significant cost savings by the end of 2017 that will continue to help lower its unit costs. Along with some ancillary revenue initiatives that will roll out next year, the company believes it can maintain or increase its operating margin, too. Throw in Copa's capacity growth forecast of 9% in 2018, and you've got a recipe for continued earnings expansion next year. Analysts now estimate 2018 earnings growth of roughly 16%.

In the meantime, Copa pays out a 2.4% dividend yield, and trades at a forward P/E of roughly 14.4. In my book, that seems a very reasonable price to pay for such a quality company with plenty of growth still ahead.

10 stocks we like better than Copa HoldingsWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Copa Holdings wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of November 6, 2017

Andy Gould owns shares of Copa Holdings. Andy Gould has the following options: short Nov. 2017 $105 puts on Copa Holdings. The Motley Fool recommends Copa Holdings. The Motley Fool has a disclosure policy.