Tuesday, December 22, 2015

8th AIM student equity update (by John Grant): Grupo Aeroportuario del Pacifico SAB de CV (ticker: PAC): ¡Viva México!

PAC (Grupo Aeroportuario del Pacifico SAB de CV): 
Mexico's Middle Class is Ready to Fly!

By: John Grant, Student at Marquette University

Image result for Grupo Aeroportuario del Pacifico SAB de CV  logo

Disclosure: The International AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Summary

PAC operates airports in the western Pacific area of Mexico. Positive growth for the Mexican travel and tourism sector is projected to make it one of the most profitable sectors over the next decade.

·         The Mexican economy is improving, influencing upward trends in consumer confidence and spending levels - and the middle class is growing.

·         Based on OPEC’s recently press releases, low commodity prices will continue to benefit margins and earnings for PAC - and travel will be on the rise.

·         Strong 3Q15 results are likely to beat year-end earnings estimates continuing a strong trend.

·         Low commodity prices, high Mexican travel and tourism - and potential future earnings 'beats' could elevate the price of PAC past its 52-week high of $96. The stock currently sells for about $93 per share.

Grupo Aeroportuario del Pacifico SAB de CV Sponsored ADR Class B (NYSE: PAC) remains rather attractive with the Mexican Travel & Tourism sector thriving, positive outlook on the Mexican economy, low commodity prices and strong 3Q15 and projected FY15 financial results.

The World Travel & Tourism Council (WTTC) determined that in FY14 the travel & tourism (T&T) represented $US 189B of Mexico’s GDP (14.8% of total GDP) representing twice the size of the education sector (7.4%) and almost two and half times larger than the banking’s GDP impact (6.3%). From 1995 to 2014 the sector has expanded by 80%, which is 800 basis points higher than the entire Mexican economy, which only expanded 72%. The WTTC has estimated T&T will expand at an annualized rate of 3.6% vs. the total economy’s forecast of 2.9%.

Mexico’s economy recovered significantly between 2013 – 2014 and has been showing positive economic indicators for FY15 and FY16. Real GDP Growth (%y/y) picked up in 3Q15 versus 2Q15 (2.6% vs. 2.3%) and matched the previous peak of 2.6% in 4Q14. 

Unemployment hit a peak of 4.7% in July and August 2015, but has been slightly decreasing to the official estimate of 4.6% in Oct-15. Mexican Consumer Confidence Indicator (% bal) has been on the rise since dropping from 94.7 to 90.4 between Jun-15 and Aug-15 to 92.5 as of Nov-15. FactSet estimates have indicated Real GDP Growth (%q/q) will be 3.0% in 4Q15 (2.5% y/y FY15) and 3.0% y/y FY16. Additionally, exports are estimated to experience a %y/y growth of 7.8 FY15, 50 basis points higher than 7.3% y/y growth in FY14.

PAC is well positioned to gain top line growth from the improving Mexican economy and Mexican T&T sector. Revenues have increased at a CAGR of 11.5% between FY10 – FY14 and are on track to grow by 20% y/y at FY15 end according to FactSet estimates. Low commodities prices have made it possible for PAC to expand margins and earnings. The company has increased gross margins from 49.8% in FY13 to 53.8% in FY14 with margins projected to improve. Net margin dropped off between FY13 and FY14 (43%-40.4%), lower commodity prices should decrease cost of doing business and increase margins in FY15 and FY16.

The market has identified low commodity prices as beneficial to PAC’s business model, this can be observed based on dramatic stock price increased after OPEC press releases that put immediate downward pressure on commodity prices in FY15. Notable price increases occurred on December 4th and July 1st after the fourth meeting of the OPEC-Russia Energy Dialogue and 168th meeting, respectively.

What has the stock done lately?

PAC was added in November 2014 by Kyle Lawrence (AIM ’14), he recommended a price target of $82 when the stock was trading at $68. Since then, the stock has appreciated to $92.08 (12/15/15 closing price), representing an upside of 35.41%. As described before, the market has taken decreasing commodity prices into account when trading and valuing the stock. When press releases or events caused a depreciation for the price of oil, PAC would appreciate. PAC’s stock price has appreciated 45.7% in FY15, which immensely outperforms their 18.8% average.

Past Year Performance:

Source: FactSet

My Takeaway



The overall Mexican economy and travel & tourism growth will have positive headwinds on PAC’s future bottom and top line growth. Current supply levels of oil should keep commodity levels low as OPEC has indicated they will continue to produce, and keep producing, oil, having positive impacts on PAC’s bottom line growth. Although PAC has seen substantial price appreciation in FY15 (45.7% vs. 18.8% in FY14), I believe there will be continued price appreciation. PAC’s 52 week high is $97.05, I believe PAC’s stock price will enter triple digits before their next reporting date (2/24/16). This stock is set to soar!

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