CAAP Stock Is About To Triple (Again)

CAAP stock surged from $2 to $6 simply from avoiding bankruptcy. Now it's heading to $20 thanks to surging profit margins, improving macro picture, and election catalyst.

Corporacion America Airports (NYSE:CAAP) is the world’s largest private airport operator by number of airports (54). It handled 84 million passengers in 2019 and operates in six countries. Notable holdings include the Buenos Aires airports, Brasilia, Florence and Pisa (Italy), and the capital city airport in Uruguay.

As you might expect, shares collapsed in 2020, with the stock eventually dropping from its $16 IPO price to just $2 at the lows.

In October 2020, I issued my strong buy recommendation on CAAP stock, highlighting that it had already derisked its balance sheet thanks to new non-dilutive cap raises meanwhile some key airports were reopening before the holidays. And indeed, that marked the low for CAAP stock

So far, so good. And here’s why CAAP is going to triple again and become a ten-bagger ($2 to $20) off its pandemic lows.

The First Triple: Improving The Balance Sheet

CAAP’s first stock price triple was from simply staying in business.

In 2020, it looked like the company might go bankrupt as it had more than a billion of debt and no cash coming in. However, CAAP was able to get low and no interest loans from various countries where it operates. It also received various forms of compensation in return for the loss of revenues during the pandemic. These measures gave the company ample financial flexibility to make it to 2021 when revenues meaningfully recovered.

Additionally, as a massive form of pandemic relief, the Argentine government gave CAAP a 10-year extension on its airport leases (from 2028 to 2038) single-handedly eliminating the biggest prior to the risk, namely that its largest concession package had a short operating life.

CAAP is back to cash flow positive and has no near-term debt to worry about. That’s how the stock got from $2 to $6. Just avoiding bankruptcy.

Now comes the next triple as people realize CAAP is worth a lot more today than it was at the time of its 2018 IPO when it debuted at $16/share.

The Second Triple: CAAP Is Becoming A Cash Flow & Earnings Machine

CAAP delivered absolutely sensational earnings in August, far ahead of anyone’s expectations.

The company earned 43 cents per share in Q2, which absolutely blew the analysts' 6 cents per share estimate out of the water:

Not only the company returned to profitability, it’s become a dirt cheap stock in a single quarter on a GAAP EPS basis. Prior to this earnings report, analysts had CAAP's forward earnings at 58 cents per share for the next year which had put the stock at 10x forward earnings. 

Given that CAAP just brought in 43 cents in a single quarter, that 58 cent annual estimate is clearly much too low. Annualize the 43 cent earnings over a year, and that would be $1.72 per share of earnings, which would put the stock at a P/E ratio of less than 4.

As you can see, analysts had modeled just 20 cents for Q3 earnings and even less than that in the all-important holiday-powered Q4. These estimates will have to go up given that CAAP produced record results in Q2 whereas analysts thought the company would barely break even.

Record Profits Even On Just 75% Of Pre-Covid Traffic Levels

All this would be good enough on its own. Who doesn't like a quickly-growing business at 4x earnings?

But there's another key element that makes CAAP stock so exciting right now. That is that the company posted these record earnings while garnering less than 75% of the passenger traffic it received in the same period of 2019.

Specifically, while traffic is back to near 100% of pre-Covid levels in various CAAP markets such as Italy, in the primary Argentina market, CAAP is seeing just 70% of its 2019 traffic levels right now. Like elsewhere in the world, Argentine traffic will get back to 100% in due time and if we're already getting record profits at 70% traffic, just imagine what the numbers will look like once the company's biggest holding is back to normal performance. (Argentina was slow to recover due to leaving Covid restrictions in place far longer than the rest of LatAm).

I’d also note that the Mexican airport operators are already seeing 110% of pre-pandemic traffic levels. LatAm isn’t just recovering from the virus — our travel industry is reaching new heights.

Just how did CAAP deliver such strong financial results while traffic lagged so badly?

That's because CAAP made big improvements in its operations. Costs are down roughly 20% thanks to sharp reductions in overhead that were realized during the Covid crisis. Meanwhile, revenues are rising from both aviation and non-aeronautical services thanks to the current inflationary environment.

Use fees for the company's Argentine airports on international flights have risen from $51 to $57 per passenger, for example. Important note: These use fees are denominated in dollars, not pesos, which is why I prefer CAAP to Argentine companies reliant on peso-based revenues. Hyperinflation doesn’t have the same bite when you earn in hard money.

This all creates an amazing profit margin backdrop for CAAP. It slashed 20% of operating costs and is seeing lower expenses more generally since the Argentine Peso has devalued dramatically recently. However, it brings in its revenues in dollars and has increased the fee rate in said dollars as well.

CAAP: Absurdly Cheap By Any Metric

This article was originally published for subscribers in August following Q2 earnings with the stock at $5.80. Valuation metrics are slightly though not considerably higher at $7 now.

The question always comes up on how to value CAAP. The business is around 60% Argentine revenues and EBITDA and 40% everywhere else (Italy, Brazil, Armenia, and other smaller countries).

So let's take a crack at valuing this.

The company has $1.2 billion of net debt and a market cap of $900 million, putting the whole enterprise at $2.1 billion. The company has 160 million shares of stock outstanding, so every $1 the stock appreciates adds $160 million to the current $2.1 billion EV.

EBITDA is slated to come in around $350 million this year, with that rising to $500 million next year. So shares are trading at 6x EV/EBITDA now and 4x next year's EBITDA. This compares to the Mexican airports, currently at 10x EBITDA and which normally trade at 15x. Meanwhile developed market airports often sell for 20x+ even though they have far slower growth. The Thai airport group was also selling north of 20x EBITDA prior to the pandemic.

People will say, but it's Argentina, of course the EBITDA multiple is super depressed. Sure, I get it.

But, don't forget that 40% of the business is *not* in Argentina. Specifically, non-Argentine sourced EBITDA looks to be around $150 million this year and $200 million next year.

Conservatively, let's value that at 10x EBITDA, in line with the (depressed) prices where the Mexican airport operators currently trade. I think this is much too low, especially since it includes CAAP's Italian airports. European airports normally are worth 20x. But let's lowball it and say CAAP's non-Argentine package is worth just 10x EBITDA.

The non-Argentine airports will do $200 million EBITDA next year, and thus are worth $2 billion. The entire enterprise value of CAAP is $2.1 billion today. So, the Argentine business is selling for $100 million or approximately 0.5x EBITDA.

Suppose we think the non-Argentine airports are worth 10x EBITDA and the Argentine airports are worth 5x EBITDA. I see both of these as too low, but we're being conservative here.

That means the international airports are worth $2 billion in 2023 and the Argentine airports are worth $1.5 billion. That gets us to $3.5 billion of EV versus the current valuation of $2.1 billion, or $1.4 billion of undervaluation. As noted above, due to the small float on the stock, it doesn't take much ($160 million) to tack on another buck to the stock price. 

Long story short, using exceptionally conservative multiples for the airports, we get to a price target of $14.38 per share over the next 12 months.

If we use more realistic multiples of 12x EBITDA for international airports and 7x for Argentina, we get a 12-month CAAP price target of $20.62 per share versus the current $5.80 share price.

How To Close The Valuation Gap

It's wonderful that CAAP is selling at a ridiculously cheap valuation on EBITDA and now earnings as well. But what makes the market realize that there is opportunity here?

First up, the company will screen much better going forward. Now it is profitable, and once there are trailing twelve months of earnings like this, we'll have a mid-single digit P/E ratio. That attracts attention by itself.

For another, the company has done a tremendous job of managing its liquidity. When I was purchasing shares at $2 in October 2020, I was legitimately worried about the company potentially going bankrupt. Now it has raised funding and extended debt maturities all over the place (and, as a reminder, CAAP is a holdco, all the debt is held at each country level, so problems in one country don't imperil the mother organization). 

CAAP now has no significant debt maturities in 2022 or 2023, meaning it has two years to print cash now before worrying about upcoming 2024 obligations. Not a problem. Management is committed to lowering its Debt/EBITDA ratio even further before spending aggressively on other matters.

The second catalyst is upcoming Argentine presidential elections next year.

You'll recall that CAAP went public at $16/share in 2018 when capitalists were in power and Argentine stocks were optimistically valued. I made one of my all-time great short calls betting against Argentina's Banco Macro (NYSE:BMA) at $88/share; it would go on to plunge to $13 once the socialists swept back into power.

Anyway, Argentina trades on the political cycle. You buy when the socialists are in power and sell once magazines like the Economist start hyping up the next pro-business government.

Predictably, following a botched Covid response and 70% inflation rate, the current socialist Argentine government has crashed and burned. The pro-business side has great odds heading into next year's election, and the media will hype up Argentina as a comeback story as this comes into view early next year.

As discussed above, the Argentine airports are currently selling at less than 1x EBITDA using a conservative valuation on the international business. I see a good chance that folks will take a closer look at the numbers next year and realize that CAAP's flagship Buenos Aires airports are being given away for nothing.

Additionally, I'd note that since CAAP is a controlled company, the float is tiny, less than 35 million shares. Any buying will set off a big marginal move in the price. See November 2020, for example, when CAAP shares doubled in a single day following news that they'd gotten a 10-year concession extension for the Argentine airports.

Hilariously enough, there is close to 20% of that tiny float that is currently sold short:

I'm not normally someone interested in short squeezes. But short selling an airport operator at 4x forward EBITDA into a global travel recovery is immensely stupid and I won’t shed a tear when these folks get demolished.

To wrap up, the company is looking at nearly $2 of earnings per share and $500mn+ of annual EBITDA by the end of next year. I see $14/share as the absolute minimum reasonable valuation for the business at those numbers, and price targets north of $20 make sense with any positive developments in Argentina.

CAAP tripled once, and now it’s about to do it again.