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Investment Thesis
Corporación América Airports (NYSE:CAAP) has experienced significant growth, rallying over 100% from its 52-week low, as global air traffic continues to rebound. The company operates multiple high-quality airports in prime locations, which positions it to benefit from the ongoing expansion of the travel industry. With strong momentum in the travel sector, the company’s latest earnings have been extremely strong. Despite the increase in share price, the company’s valuation remains discounted compared to its peers. Therefore, there is still potential for further growth.
Quality Airports in Prime Locations
Corporación América Airports is a Luxembourg-based airport operator that manages 53 airports in six countries, including Argentina, Uruguay, Italy, Brazil, Ecuador, and Armenia. These airports collectively serve over 80 million passengers annually, with the majority of traffic coming from Argentina. In fact, Argentina accounts for 60% of total revenue, primarily due to its 37 airports. One of the company’s notable airports is Ezeiza Airport, which is Argentina’s most important airport and contributes to 79% of the country’s total international passenger volume. It is located in Buenos Aires, one of the world’s most popular travel destinations. The company also owns Florence Airport and Pisa Airport in Italy, which are both leading airports situated in Tuscany, a major tourism spot with multiple world heritage sites. Additionally, the company operates Carrasco Airport in Uruguay, the largest airport in the country, located in Montevideo. The strategic locations of these airports provide the company with strong competitive advantages. Limited availability of land in prime locations, coupled with high regulatory barriers and capital requirements, make it difficult for other companies to enter the same cities.
Rebounding Travel Industry
Thanks to pent-up demand and government stimulus worldwide, the global travel industry has been rapidly rebounding. Corporación América Airports has also experienced this rebound, as shown by its passenger traffic already recovering to 92% of pre-pandemic levels in the first quarter of 2019. Some countries, such as Armenia and Ecuador, have even exceeded their pre-pandemic traffic levels. Looking ahead, the company’s long-term prospects appear promising. Argentina, its largest market, is expected to grow its travel industry from $6.71 billion in 2023 to $8.62 billion in 2027, representing a solid compounded annual growth rate (CAGR) of 6.4%. Uruguay, the company’s second-largest market, is also projected to experience a CAGR of 5.1% in its travel industry. Considering the company’s presence in popular travel destinations, Corporación América Airports is well-positioned to benefit from these growth trends.
Strong Earnings
Corporación América Airports recently reported its first-quarter earnings, which were impressive considering the current macroeconomic backdrop. The company achieved revenue of $382.1 million, a 48% year-over-year increase compared to $258.1 million. Aeronautical revenue grew by 55.5% from $119.4 million to $185.6 million, while non-aeronautical revenue increased by 41.6% from $138.8 million to $196.5 million. The growth in revenue was driven by higher passenger traffic, which saw a 37.3% year-over-year increase from 13.5 million to 18.5 million. Notably, traffic in Italy and Armenia saw significant increases of 61.5% and 83.1%, respectively. The company’s operating income grew by 96.8% year-over-year from $51.8 million to $102 million, demonstrating improved operating leverage in response to higher traffic volume. The operating margin also expanded by 660 basis points from 20.1% to 26.7%. Adjusted EBITDA increased by 57.6% year-over-year from $89.2 million to $140.6 million, accounting for 36.8% of total revenue. The company’s earnings per share (EPS) reached $0.20, representing a 22.1% year-over-year increase. Thanks to the increased earnings, the net debt/adjusted EBITDA ratio declined from 5.1x to 2.1x.
Cheap Valuation
Despite the substantial rally in its share price, Corporación América Airports remains undervalued. The company currently trades at an enterprise value/EBITDA (EV/EBITDA) ratio of just 5.7x, taking debt into account. In comparison, other major airport operators such as Aena S.M.E. (OTCPK:ANYYY) and Grupo Aeroportuario del Sureste (ASR) have an average EV/EBITDA ratio of 10.4x, presenting a premium of 82.5% over Corporación América Airports. Additionally, the company’s current EV/EBITDA ratio is lower than its historical multiple of around 10x before the pandemic. This further supports the argument that the company is undervalued.
Risks
There are some risks associated with investing in Corporación América Airports, primarily related to Argentina and macroeconomic headwinds. Since the company has a significant presence in Argentina, its outlook is heavily influenced by the state of the country. The political landscape in Argentina has been unstable, and its economy continues to deteriorate, with the inflation rate reaching 114% year-over-year in May. These factors could impact outbound and inbound travel, and therefore, investors should monitor them closely. Another notable risk is the potential economic slowdown in various countries. While the US economy remains relatively stable, other nations are experiencing a deceleration. Given the company’s substantial presence in less-developed countries, it is more exposed to macroeconomic headwinds.
Conclusion
Corporación América Airports presents a compelling opportunity to invest in the rebounding travel and tourism industry. The company’s high-quality airports in prime locations enable it to capitalize on the increasing travel volume. The latest earnings report indicates strong momentum in both the top and bottom lines. Despite the significant rally in its share price, the company’s valuation remains attractive compared to its peers. Therefore, there is still upside potential for investors. Overall, I recommend a buy rating for Corporación América Airports.
