Corporación América Airports S.A.: Undervalued Growth Potential and Strong Financial PerformanceSmall Caps 2 replies 0 likes 0 votes 131 views
Corporación América Airports S.A. (NYSE: CAAP), Argentina's airport operator, has shown remarkable recovery and growth over the past two years. Despite the significant increase in share price, there is reason to believe that the stock is still undervalued.
When the coverage on CAAP began in October 2020, the stock was trading at $2. Since then, the company has successfully addressed its debt issues and witnessed a resurgence in airline traffic. In 2022, CAAP returned to profitability based on generally accepted accounting principles (GAAP).
Shares have surged well above pre-COVID-19 levels, leading some traders to consider taking profits. However, recent developments and the company's future prospects indicate that further appreciation in the stock price can be expected.
CAAP operates airports in various countries across Europe and South America, making it a more complex operation than airport operators with a narrower focus. While the recovery of airline traffic was rapid in some markets, the Argentine market, which accounts for half of CAAP's business, took longer to reopen due to stricter COVID-19 regulations imposed by the government.
Impressively, CAAP achieved profitability in mid-2022, even with less than 80% of its pre-pandemic traffic. Now, in June 2023, the company's passenger traffic has exceeded pre-pandemic levels, with a 2.6% increase compared to the same period in 2019. This positive trend in traffic indicates significant potential for further growth, as other publicly-traded airport operators experience a deceleration in their growth trajectories.
Moreover, CAAP's management efficiently cut costs during the pandemic, resulting in a lower operating cost base. This is reflected in the company's improved EBITDA margin, which is now over 1,000 basis points higher than before the pandemic. Additionally, CAAP's earnings have surged, reaching $1 per share and are expected to continue growing given the current annualized pace of over 30% traffic increase.
CAAP's unique approach involves investing in airport concessions with significant growth potential. Unlike some operators that prioritize near-term cash flow generation, CAAP focuses on underinvested assets, allowing them to reposition properties for substantial growth. Recent developments include the opening of a new terminal in Buenos Aires and expansions in Brazil and Florence, Italy, which will enhance the company's reach and potential for long-term growth.
The structural bull case for CAAP is evident, as the company operates in infrastructure assets with a dominant market position. With a reasonable leverage policy, CAAP can deploy capital for high returns, driving future growth. Furthermore, CAAP's operations are held through subsidiaries, minimizing the risk associated with the debt load and ensuring operational resilience.
Considering CAAP's impressive financial performance, it is surprising that the stock remains remarkably cheap in terms of its EV/EBITDA ratio. Despite a sevenfold increase since October 2020, CAAP shares trade at a modest 6.5x EV/EBITDA. To add one turn to the EV/EBITDA multiple, the stock would need to rally nearly $4/share. If CAAP were to trade at a multiple of 10x EV/EBITDA, the stock price would need to reach the high $20s. These projections are based solely on the next twelve months' numbers without considering any future EBITDA growth.
Targeting a 10x EV/EBITDA multiple is not an aggressive goal. When CAAP had its initial public offering (IPO) in 2018, shares were priced around 11x EV/EBITDA. Considering the company's improved financial position, a similar multiple would be reasonable. Furthermore, Mexican airport operators historically trade at EV/EBITDA ratios ranging from 12 to 15x, providing additional support for potential multiple expansion.
While it is understandable to approach Argentine assets with caution due to political and economic factors, it is important to note that half of CAAP's profits come from markets outside of Argentina. Additionally, CAAP's revenue from international tourists arriving in Argentina is denominated in dollars, mitigating the impact of currency devaluation. With upcoming elections and a conservative lead in the polls, the political overhang on CAAP stock should diminish as investors anticipate a more business-friendly government.
Considering the progress made by CAAP since its IPO, the stock remains attractively valued. With a forward earnings multiple of just 14 and a history of surpassing estimates, CAAP offers growth potential at a reasonable price. The company's robust year-over-year traffic growth, combined with its improved financials, suggests that CAAP is a growth stock trading at a value price.
While the recent 160% increase in share price may give some investors pause, it primarily reflects the correction of the previously mispriced shares. Further upside is expected, with the next target being a trading level above the IPO price of $17 and the potential for the stock to reach the $20s as the election catalyst unfolds and Argentine assets appreciate.
In conclusion, despite the significant gains in share price over the past two years, Corporación América Airports S.A. appears to be undervalued based on its strong financial performance, traffic growth, and future prospects. Investors should consider the growth potential and reasonable valuation of CAAP shares, which make them an attractive investment opportunity in the current market climate.